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The art of exposure management. (risk management by banks in international markets)


Every day, between the opening and closing of the world's money markets, financial institutions commit billions of dollars to the international payments machinery on the strength of a hurried verbal handshake between dealers and a confirming telex.

It's not clear that this is a risk in the conventional sense; the failure of a counterparty is rarely a complete surprise, and until banks introduce hourly interest rates there's no cash management requirement involved. But banks everywhere are having to respond to the risks that very volatile markets--in

currencies and interest rates--present to their burgeoning intra-day exposures. Building information systems to contain and analyse the vulnerability of these very short-term exposures has become a high priority in all the financial institutions that trade in volume on the world's money markets.

On Thursday, February 27, the foreign exchange market in New York jumped and staggered through the sort of momentary turbulence that has become familiar to currency traders all over the world. This followed a Japanese newspaper report, quoting US Federal Reserve vice chairman Preston Martin, that there were plans to call an emergency meeting of the Group of Five ministers of finance to discuss ways of stabilizing the dollar.