ECCB 2022-2023 Annual Report and Financial Statements

Eastern Caribbean Central Bank Notes to the Financial Statements For the year ended 31 March 2023 (expressed in Eastern Caribbean dollars)

3. Financial risk management (continued)

c) Market risk (continued)

ii)

Currency risk

Currency risk is the risk that the market value of, or the cash flows from, financial instruments will vary because of exchange rate fluctuations. The Bank is exposed to foreign currency risk due to fluctuations in the prevailing foreign currency exchange rates on transactions and balances denominated in currencies other than the USD. Management seeks to manage this risk by setting limits on the level of exposure by currency, which are monitored daily.

Foreign investment securities

The Bank’s investment guidelines require tha t all non-US dollar securities be hedged back to the US dollar. As of 31 March 2023, the non-US securities in the foreign securities portfolio was nil (2022: nil). The investment managers have entered into forward contracts to sell the non-USD positions forward on a periodic rolling basis. All gains and losses arising from currency revaluation of these assets and the forward contracts are reported in the statement of profit or loss as they occur.

Regional and foreign currencies

The Bank facilitates the repatriation of foreign currency notes collected by member banks during their normal course of operations. The notes are purchased from the commercial banks and shipped to Bank of America on a monthly basis. To manage the foreign currency risk of holding these notes, the Bank forward sells these notes on the same day of purchase for value on the date that the counterparty receives them.

Sensitivity to foreign exchange rate movements

The Bank’s exposure to foreign exchange risk is limited to the minimum b alances held on non-USD demand accounts and investment in non-USD foreign securities. A 5 per cent (2022: 5 per cent) change in exchange rates would have increase or decrease profit or loss and equity by $1,285,229 (2022: $2,198,890). This analysis assumes that all other variables, in particular, interest rates, remain constant.

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