Currency Risk

[Guest]

.

[Patricia SF]

Thank you very much Wolfgang and Tom.  I've learned a lot from both of you regarding currency risk.  For me, this stuff is quite complicated, but I found what you wrote also very interesting.  Thanks to both of you, I now have a better grasp.

I absolutely abhor working with figures, but I tried Wolfgang's "formula" and found it pretty user friendly.  Thank you Wolfgang.

I'm trying to learn more about and understand this whole currency risk thing, so that I will no longer be afraid of it, worried about it, upset about it.  It's hard to embrace something you don't understand.

Thank you again Wolfgang and Tom for taking the time and spending the energy in explaining this to me.  I truly appreciate it.  You are kind, good people.

Patricia   

[Skimmis]

Foreign currency risk question:  How to calculate it?

Good day,

Can someone please explain to me how to calculate foreign currency risk?  Is there a basic, simple, mathematical formula?   I've asked several mathematically inclined friends and a day trader acquaintance, but to no avail.  Calculators were taken out, pencils and erasers were worn down, but everyone ended up frustrated and flustered.  The day trader told me foreign currency risk was much too complicated to explain to a layperson, so I turn here for help.

For example, how does one determine the foreign currency risk for Mongolia tugriks?  Specifically, how does one determine if their currency is over the 20%?

From the Oanda.com website:
Mongolian tugriks to United States dollarsTime period: 10/02/09 to 10/08/09.
 
Daily averages:
10/02/2009 0.00070010
10/03/2009 0.00069580
10/04/2009 0.00069580
10/05/2009 0.00069580
  10/06/2009 0.00069580
10/07/2009 0.00069140
10/08/2009 0.00069140
 
 
  Average (7 days): 0.00070 
  High: 0.00070 
  Low: 0.00069 
 
* * * * * * * * * *

From Kiva website:

Exchange rate:  1,425,5000 MNT = 1 USD

Thank you.

Patricia

And how can you calculate the risk if you lives outside the USA and buys the dollar first???

[Skimmis]

When will kiva fix their website so we can sort out loans with or without currency risk on the website?

Shouldnt need external tools for that.

http://www.nuclearspike.com/kiva/

Concerned about Currency Risk Losses? See instructions here for installing the Kiva MFI Checker Firefox Add-On to blacklist currency risk loans.
http://www.kivafriends.org/index.php/topic,3970.msg64307.html#msg64307

List of Risk Sharing MFIs here: http://www.kivafriends.org/index.php/topic,3970.msg64444.html#msg64444

[RayH]

Foreign currency risk question:  How to calculate it?

Good day,

Can someone please explain to me how to calculate foreign currency risk? 

If you can find a formula to work out currency risk that is partially valid even for a week, never mind the year or more period of a Kiva loan, you should get a job in Forex trading. It's pretty much impossible IMHO. I believe it might just be possible for an MFI to put a contract in place for a currency hedge if they have a very large exposure. But that could turn out to be prohibitively expensive or even impossible for some of these more exotic currencies. That's exactly the point of MFI investing: there is no established market for such financial instruments in many of these countries. Try walking into your local bank and selling some USD for Philippines Peso (which is hardly that exotic) and then immediately buy back your USD and see how much you have left of your original dollar bills after currency spreads and charges. As for Mongolia, foreign currency recently had to be rationed by the central bank due to pressure on the exchange rate caused by a fall in copper prices. There is no open currency exchange market there. People wanted to have dollars rather than the Mongolian currency but couldn't buy them at any price. The Moody's credit rating of the individual banks such as Xacbank is about the same as that of the whole country at B2 (perhaps meaning that the currency is as risky as the institutions themselves). And these are one of the better ones because they were actually the first Mongolian bank that qualified for any credit rating at all. I hope this doesn't come as a surprise, because this is largely what Kiva does: provide "cheaper" money to MFI's than they can get elsewhere. BTW I'm certainly not trying to scare anyone. I have made a loan to Xacbank via Kiva. But you should go in with your eyes open. There are many risks out there that even the smartest bankers don't understand or control.

[tdcheetah]

This "delayed repayment" phenomenon was first noticed in a discussion about music loans, but since it seems to be now pandemic for Komak (Azerbaijan), I wanted to point it out in the more appropriate thread.

Yeah, I've seen a number of these weird repayment schedules starting 10-12 months from now. While most of them have been for agricultural loans -- which I can understand given that it takes time to grow crops/livestock -- at least two other music-related loans from Komak have done the same thing recently:

It's not just music and not just agricultural. It seems to be the large majority, if not all, of Komak's loans don't begin repayment until 10+ months out.   Currently fundraising include:

General store starting repayment in Sept. 2010:
http://www.kiva.org/app.php?page=businesses&action=about&id=147971

Taxi starting repayment in Oct. 2010:
http://www.kiva.org/app.php?page=businesses&action=about&id=149692

Clothing store, same starting date:
http://www.kiva.org/app.php?page=businesses&action=about&id=149890

Computer repair, same starting date:
http://www.kiva.org/app.php?page=businesses&action=about&id=149921

Comparison: I've made two loans to Komak (a 4-star MFI) in the previous 3 months.  The agriculture loan started repayments 8 months out.  The clothing loan started "only" 6 months out.

Considering that Komak is one of the MFIs sharing currency risk, I'd think this is a disturbing trend as it means now 10+ months for possible currency depreciation to deplete repayment before lenders even start getting repayments from the MFI.




Lee

[David2051]

As you pointed out, Komak is black listed for currency risk already.  At times I will make an exception and loan with currency rick, but I would never make one of these first payment late next year loans.  I really don't understand what they are thinking...   

[tdcheetah]

As you pointed out, Komak is black listed for currency risk already.  At times I will make an exception and loan with currency rick, but I would never make one of these first payment late next year loans.  I really don't understand what they are thinking...  

Well, my first loan w/Komak was because I'm supporting agriculture loans in general and Persons with Livestock in specific; as I said in the other thread, I know food takes time to grow, so I wasn't as concerned by a lag time. (And somehow, there seems a fairly substantial difference between 6-8 months and 10+ months. It's all in the perception, of course.) 

I do see at least one other MFI with end-of-term loans (and also currency risk possible), AMK in Cambodia, which specializes in agricultural/group loans.

http://www.kiva.org/app.php?page=businesses&action=about&id=142818

I'd say that I won't necessarily go out of my way to avoid delayed repayment/end-of-term loans (though I am always keeping an eye on my level of long-term commitment to Kiva, as I do with any investment or organization)... but yeah, at this point the loan'd have to have a very compelling story for me personally to overcome the double whammy of being coupled with "currency risk possible".  Playing the odds is one thing.  Playing with a stacked deck if I'm not the one doing the stacking...


Lee

(And boy, I absolutely love the Kiva MFI Checker in Firefox even if I don't always follow its advice. However the other more extensive portfolio tools available all seem to require Silverlight/Advanced Microsoft, and I'm just not at that point yet where I'm willing to fight possible technical issues by myself in order to be functionally superior. Perhaps someday....)

[Skimmis]

This "delayed repayment" phenomenon was first noticed in a discussion about music loans, but since it seems to be now pandemic for Komak (Azerbaijan), I wanted to point it out in the more appropriate thread.

It's not just music and not just agricultural. It seems to be the large majority, if not all, of Komak's loans don't begin repayment until 10+ months out.   Currently fundraising include:

General store starting repayment in Sept. 2010:
http://www.kiva.org/app.php?page=businesses&action=about&id=147971

Taxi starting repayment in Oct. 2010:
http://www.kiva.org/app.php?page=businesses&action=about&id=149692

Clothing store, same starting date:
http://www.kiva.org/app.php?page=businesses&action=about&id=149890

Computer repair, same starting date:
http://www.kiva.org/app.php?page=businesses&action=about&id=149921

Comparison: I've made two loans to Komak (a 4-star MFI) in the previous 3 months.  The agriculture loan started repayments 8 months out.  The clothing loan started "only" 6 months out.

Considering that Komak is one of the MFIs sharing currency risk, I'd think this is a disturbing trend as it means now 10+ months for possible currency depreciation to deplete repayment before lenders even start getting repayments from the MFI.




Lee

I cannot understand why there should bee currency depeciation on a loan in the period not paying back ?
When there is currency risk, it should be more enough too calculate the loss not month for month, but totalt loss ans subtract for gain, in the final payment.

[DoubleR]

As you pointed out, Komak is black listed for currency risk already.  At times I will make an exception and loan with currency rick, but I would never make one of these first payment late next year loans.  I really don't understand what they are thinking...   

The Kiva repayment schedule should be a reflection of the actual borrower's repayment schedule.  If there is an 8-10 month delay before the first repayment, then Komak must now be offering a grace period to its borrowers.

This could be a reflection of the local economic situation (speculation on my part).  Personally, I believe country risk can have a greater detrimental impact on an individual Kiva portfolio than currency risk.  This could be a case where the two go hand-in-hand.  However, looking at Oanda.com, the value of the AZN against the USD for the past 500 days hasn't fluctuated over 2%.

Here's something else I found interesting... if you look at the loans from Azerbaijan using Nuclearspike:
- loans with Komak share currency risk, but do not have non repayment risk (i.e. Komak will repay even if the borrower defaults)
- loans with Agroinvest do not have currency risk, but do have non repayment risk (i.e. Kiva lenders assume the loss if the borrower defaults)

Based on the information I'm looking at with regard to the AZN/USD fluctuation, it seems non payment risk is a bigger threat IMHO.

Regards,
Ronan

[David2051]

I cannot understand why there should bee currency depeciation on a loan in the period not paying back ?
When there is currency risk, it should be more enough too calculate the loss not month for month, but totalt loss ans subtract for gain, in the final payment.

Sverre, the value of one country's currency changes on the world markets every day compared to another country's currency.  This has nothing to do with a particular Kiva loan.  It is based on the overall economy of the two countries.  The longer the time period is, the larger the currency risk could possibly be.

If the Azerbaijan New Manat began to devalue relative to the US Dollar, if it was a trend that continued, say 2% each month, after 13 months it would be devalued by more than the 20% currency risk "sharing" limit.  If the Kiva loan did not start repaying until after 10 months, at that point almost every loan repayment would cause currency loss to the lender.   An identical loan that started repaying immediately for a term of 12 months might not cause any currency loss to the lender at all.

The main point I get from this is that longer terms present more potential currency risk.  It really doesn't matter if a payment is due in a particular month or not, it's just that a longer term of loan allows more time for currency depreciation to occur.