353FIN: The two major banks in this study are DBS Bank and United Overseas Bank (UOB) both based in Singapore: International of Finance, Assignment, CU


The two major banks in this study are DBS Bank and United Overseas Bank (UOB) both based in Singapore but have subsidiaries throughout Asia and beyond. DBS was founded in 1968, it is one of the most prominent financial groups based in Asia, which focuses on digital advancements, including banking services, as well as being an advocate of sustainability. UOB, as a universal bank, started its operation in 1935 and now has a significant market share in Southeast Asia, offering products and services from basic banking for individuals to commercial and investment banking. Both banks are prone to the FX market because of their cross-border activities, such as imports/exportation and investments in various foreign currencies.

The movement of currency exchange rates is still a major problem for both organizations, which creates high volatility and can affect the reported profits of DBS and UOB. Foreign exchange risk originates from foreign exchange rate changes likely to impact their foreign currency, assets, liabilities, or cash flows. To prevent the given risks, both banks use hedging tools.

These involve hedging techniques, which involve the use of contracts in financial markets, such as forward contracts, options, and swaps, as a way of minimizing the volatility of the business and thus protecting it from changes in the value of foreign currency. Therefore, DBS and UOB actively manage the currency risks to mitigate the risks that appear because of fluctuations in exchange rates and promote sustainable development in the global financial system.

Background Foreign Exchange Market Exposure

Forex risk means the risk that changes in currency exchange rates can affect the organization’s performance or financial rapport. In the case of DBS and UOB, big banks with a global footprint, this is part of their natural way of operating. Opening and presence of commercial banks in different countries means they operate in various currencies in lending, investment, and deposit-taking operations. Therefore, any unfavourable move in foreign exchange rates reverses its earnings, asset values, and liabilities.

Forex exposure can be categorized into three types: financial flows, verbal and written translation, and credit relationships, as well as economic slumps. Exchange rate exposures are mainly caused when a company’s future cash expenses and revenues are affected by foreign currency fluctuations (He, 2021). Translation exposures are one factor that affects a company’s consolidated financial statements, notably in the case where the parent company’s headquarters is using a different currency from the units. Economic exposure is closely related to the company’s stock price, which is influenced by factors that affect future earnings through the impact of currency fluctuations.

The intricacies of forex exposure knowledge are fundamental to multinational banks like DBS and UOB, which must witness the complex interplay of global financial rules and market conditions. Having efficient foreign exchange risk management ensures you stay safe in the financially uncertain landscape of currency volatility and gain a competitive edge. For example, a competitive edge is the bank’s ability to use a sound FX risk management strategy to earn more stable and predictable income in foreign markets. This calls for non-stop tracking of the currency dynamics, regulatory changes, and economic indicators worldwide. Banks always seek the best policy that will lead to profitability and minimal risk in foreign exchange transactions.

Analysis of Currency Exposures

3.1 DBS Group Holdings Ltd

Regarding geographical influence, DBS Bank is aimed at the most significant Asian markets, such as China, Hong Kong, Taiwan, and Indonesia (DBS Annual Report 2021 | DBS Bank, 2021). As shown in the 2023 report, DBS’s move to expand its footprint has been significant, particularly in China, where it continues to emerge further as part of its broad regional Asian expansion (DBS Annual Report 2023 | DBS Bank, 2023). This geographical differential exposes DBS entirely to considerable forex risk.

DBS deploys various financial instruments such as forwards, futures, options, and swaps to handle its currency risks (DBS Annual Report 2022 | DBS Bank, 2022). These tools offset adverse currency exchange rate movements, stabilizing the business’s cash flows and profit margins. The bank’s approach to forex risk management consists of building a strategic policy that is an indispensable tool for its global risk management framework, complying with international standards, and striving for financial stability.

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3.2 United Overseas Bank Limited (UOB)

UOB’s functions have three areas of influence: SEA, which consists of Malaysia, Thailand, and Indonesia (Featured Artwork, n.d.). In addition to DBS, UOB could be affected by transaction, translation, and economic forex risks due to its international operations.

UOB uses a comprehensive risk management system that identifies, measures, monitors, and controls exchange rate risks. The managerial plan focuses on using natural hedges, if possible, as well as derivative financial instruments for unavoidable risks (About UOB, n.d.). The commonality among their annual reports is a policy of caution related to risk management, which is custom-tailored to the geographical specifics of their operations and pays attention to the subtleties of each locality’s risk portfolio.

3.3 Comparative Analysis

While these two banks may differ in structure and size, they maintain risk management frameworks that align with international and local regulatory requirements. DBS is known to be more adventurous in regional expansion, especially in China, possibly leading to a higher volume of transactions and economic risk compared to UOB. Cautiously, UOB is concentrating on the opportunity to both enlarge and deepen its market presence. By doing this, UOB could focus on its risks in various areas. Different strategies present a way of handling forex risks and determining efficient and resilient daily business and financial performance under unstable international market conditions.

DBS and UOB proactively utilize derivative tools for hedging, highlighting an advanced risk mitigation system. Nevertheless, their particular range of derivatives, as well as their corresponding expenses, vary their strategies. DBS’s wide range of financial instruments leverages is created to use the market conditions to get the best economic results even in turbulent markets.

However, UOB’s choice of natural hedges accentuates the strategy behind its cost control approach, which is leaning towards stability rather than possible high returns. These unique strategies signify the risk appetite and construe a firm’s financial management and adaptability to the global’s ever-changing financial dynamics.

In brief, DBS and UOB, considering their large-scale foreign operations as central banks in Singapore, are highly vulnerable to the issue of forex risk. Both created sophisticated risk management techniques from their business concept and operational matters. They should be ready to evolve their risk management processes as they keep expanding globally to protect their assets and realize steady growth amidst turbulence in the international finance arena. The in-depth knowledge of these methods gives the investors an idea of each lender’s financial position and depicts their capabilities in dealing with the complex global financial markets.

Analysing the hedging methods utilised by the chosen companies to manage their currency exposures.

Hedging methods are the key components that are used by companies for reducing the level of risk for exposure in the currency market. Moreover, the companies utilise the currency hedge mechanism to minimise the level of losses, that occur from currency translation at a later date. The companies used in the overall analysis are DBS Bank Limited and UOB (United Overseas Bank), where both financial institutions mainly use the hedging mechanism for securing their currency exposure, which limits the level of losses that might occur due to the unwanted currency price movement over the financial year.

Hence, companies use hedging mechanisms such as FX contracts, currency swaps, and currency options for hedging their currency exposure and minimise or nullify the level of losses, which might occur from the negative price movement of currencies. Hedging methods allow companies to secure their future transactions while reducing the probability of losses, which might occur due to the currency conversion measure (Bayesteh & Azari, 2021). However, the hedging mechanism needs to be conducted based on current financial requirements for the organisation, where the methods is sophisticated, as wrong trades or positions in the currency market could not only lead to losses but could also hinder the financial position of the company in the long run. Therefore, the overall currency exposure of both DBS Bank Limited and UOB (United Overseas Bank) are evaluated as follows.

4.1 DBS Group Holdings Ltd:

The information presented in the above figure directly shares data points regarding the overall exposure of the hedging mechanism that is used by the organisation to support its currency exposure. From the relevant analysis, it could be understood that the company uses three different types of hedging mechanisms to support its foreign exchange exposure, which are FX contracts, currency swaps and currency options.

Furthermore, the overall currency that is conducted by the organisation is listed under cash flow hedges and net investment edges in the financial report presented by DBS Bank Limited (Dbs.com, 2023). Moreover, the overall foreign exchange derivatives are listed under three different sections known as underlying notional, assets and liabilities of the organisation. Under these segments, the appropriate levels of exposure that are implemented by DBS Bank over the financial year are identified.

Therefore, banks use the hedging measure for reducing the risk from interest rate risk, which can prevent losses, while increasing the profitability measure (Matsumoto & Yamada, 2021). Hence, the overall subtotal for the underlying notion has relatively improved over the period of 2 years, while the asset and liability section of the foreign exchange derivatives have increased close to twice over a similar period.

The FX contracts are mainly conducted as both cash flow hedges and net investment hedges, where the parties have agreed to adequately transfer certain levels of foreign exchange amount at a predetermined exchange rate and date.

With the relevant changes in the level of hedging mechanism for the FX contracts, the organisation is able to improve its exposure by 611,474 million in 2022. In addition, the company also uses currency swaps to reduce the level of exposure in the currency market, where such investments are done in net investment hedges, cash flow hedges and fair value hedges, which mainly amount to 238,615 million for the current financial year.

Further analysis is on the current option contracts that are maintained by the company for adequately minimising the risk from investment, where the total exposure is at 90,707 million for the current financial year (Dbs.com, 2023). Hence, with the adequate implementation of three different currency contracts the company is able to hedge its currency exposure for the current financial year, which reduces the probability of losses that might occur in future.


4.2 United Overseas Bank Limited (UOB):

The overall hedging mechanism is mainly identified in the above figure, which helps in depicting the level of hedging measures that are used by United Overseas Bank in the current financial year. Therefore, from the overall analysis, it can be detected that United Overseas Bank is using currency swaps and customer deposits as the overall hedging mechanism for the exposure in the currency markets. The customer deposits mainly fall under the new investment hedge for United Overseas Bank during the financial year of 2022 (Uobgroup.com, 2023). Moreover, the currency swaps fall under the cash flow hedge for the organisation during the current financial year.

The hedging mechanism that is used by United Overseas Bank is relevantly low in comparison to other peers, as the company does not have higher exposure in the currency market, which can negatively affect its operations and income stream during the financial year. Henceforth, the overall hedge would directly help in improving the performance of the organisation, while reducing the prospect of future losses, which might be incurred by United Overseas Bank.

Thus, the hedging mechanism that was previously deployed by United Overseas Bank in 2021 was limited to customer deposits, which was linked with a net investment hedge conducted by the management. However, the risk exposure that was conducted during the financial year of 2021 was related to customer deposits, which stood at 4,159 million with a negative change in fair value of 33 million in foreign exchange risk (Uobgroup.com, 2023). Nevertheless, during 2022 the customer deposits mainly increased in value to 4,787 million with a positive change in fair value of 141 million.

Moreover, the analysis suggests that the currency swaps were mainly conducted during the financial year of 2022, where the total value was 72 million with a negative change in fair value of 70 million for the exposure in the currency market (Uobgroup.com, 2023). The current exposure in the currency market is relevantly low, as the organisation has a lower level of exposure in the currency market. Therefore, it can be detected that the hedging mechanism used by United Overseas Bank is relevantly lower in value when compared with the DBS Bank limited, as the currency risk exposure for the organotin is lower. Thus, companies can use hedging mechanisms such as Currency swaps, FX contracts and currency options to improve the levels of exposure in the currency market, which reduces the probability of loss, which might occur due to negative price action of the currency market.

Critically evaluate pros and cons of the hedging methods identified in (2) and relate to appropriate examples from the chosen company to support your arguments.


Evaluate Pros of Hedging Methods used by UOB and DBS.

As of significance financial organizations, DBS and UOB banks probably implemented several kinds of hedging methods to regulate the risk they might face. The typical hedging method consists of:

Forwards Contracts

Through these agreements, both banks can determine the exchange rate for any particular currency at a future date. This may decrease the likelihood of losses by offering assurance against changes in the value of currencies.

The Options Contracts

During the options agreement, DBS and UOB are granted the option instead of the responsibility, to purchase or offer a currency within a certain amount of time and at a price that has been established. Adaptation and defence against detrimental currency movements may result through this.

Currency Swaps

By having a period of time, DBS and UOB can convert a particular currency for a different one at a rate that has been established.

5.2. Evaluate pros of hedging methods used by UOB.

5.2.1. Risk Management

UOB uses risk management strategies to protect their stakeholders’ interests and maintain their financial stability while keeping adaptable enough to utilise the advantage of value-adding opportunities for the company in an atmosphere of rapid change. As well as a way to achieve sustainable, long-term expansion, and to remain committed to maintaining excellent levels of corporate governance, effective risk-management principles, and strong business practices.

5.2.2. Capital Management

It helps UOB to ensure sufficient capital for business progress and regulatory execution. Furthermore, it also maintains an effective financial structure to minimise ultimate capital costs and give their stockholders consistent dividend returns.

5.2.3. Sustainability

UOB’s business objective serves as the basis for their sustainability plan, which highlights the company’s practice of maintaining the right equilibrium between development and responsibility. The method they use analyses the prospective effects of their decisions and actions on the surroundings and stakeholders.

5.3. Evaluate pros of hedging methods used by DBS.

5.3.1. Risk Management

The overall risk emerging from unexpected business and economic changes has a major impact on DBS’s long-term aims. These risks are controlled separately through multiple regulatory methods.

5.3.2. Capital Management

DBS maintaining a strong capital position in accordance with the Monetary Authority of Singapore’s Notice, as well as the expectations of various stakeholders, such as customers, investors, and rating agencies, is the responsibility of DBS Board of Directors through capital targets. Regarding their strategic priorities, this goal is pursued while providing returns to shareholders and guaranteeing that sufficient capital resources are accessible for growth in the company, potential investments, and challenges.

5.3.3. Sustainability

The board is ultimately in charge of developing DBS’ sustainability strategy, and it has been motivated by the core objective of developing long-term value through ethical and equitable business management. DBS’s goal is to bring climate-related concerns to the forefront of their focus and integrate environmental and social considerations more deeply into the operations.

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5.4 Evaluate cons of hedging methods used by UOB and DBS.

5.4.1. Cost Implications:

DBS Bank uses an array of diverse financial instruments such as forwards, futures, options and swaps to provide the required risk mitigation tools, but at the same time, it could become very costly. These instruments need to be covered by premiums, especially by options, and their costs can undermine the bank’s net earnings. And as an example, in 2022 when the use of terrible currency risk management methods could incur a lot of cost which will reduce the bank’s net profitability margins, and this is particularly true during times of a stable currency movement when the benefits of hedging may not totally exceed the cost.

On the other hand, UOB not only does UOB utilise deposit and swap options which normally attract low fees, but opportunity costs are also involved. The large sums in customer deposits as a hedge tie up resources that could be used for other more profitable investments. According to the data, the value of customer deposits increased by 4,787 million that was accompanied by a highly positive change in fair value which indicates that there is a lot of capital invested in low-risk low-return assets.

5.4.2 Complexity and Management Inefficiencies:

DBS Bank is taking care of a FX derivative portfolio which consists of such instruments as options, swaps, forwards and so on means constant control and continuous experience in this area. These instruments are so complex that they can cause the management to be inefficient, especially in the volatile markets where rapid adjustments are needed. It is worth noting that this complexity can not only increase the number of expenses needed for the project implementation but might also lead to the mismanagement risk in the absence of proper monitoring.

Unlike other large corporations which may use complex derivatives that expose them to huge losses almost instantly, UOB’s reliance on natural hedges and simpler derivative contracts may cause it to react slowly to abrupt market shifts. This can eventually result in the loss of opportunities or the delay in making the adjustments in the hedge positions in time.

5.4.3. Hedging Ineffectiveness and Market Prediction Errors:

These banks are exposed to the risk of hedging ineffectiveness which happens if hedges fail to deliver as expected because of forecasting errors in currency movements. For example, for DBS or UOB to set up forward contracts based on predictions of the currency depreciation will result in loss of value of the contract due to the fact that the prediction is not right.

5.4.4. Regulatory and Compliance Risks:

Due to the growing global financial regulations, both banks have to change their hedging strategies to meet the new rules which is a cumbersome and costly process. Failure on a compliance part or gap can trigger monetary penalties or simply reputation damage.

5.5.5. Over-Hedging:

There is also the hazard of over-hedging, when the protection is bigger than the actual exposure. This can be observed at both types of banks, but the latter case is especially important for DBS that is more diverse in a range of derivative options. Over-hedging means the expenses will be locked and flexibility at interest rate fluctuation will be impacted, consequently reducing the bank’s capability to benefit from favourable market conditions.

5.5.6 Supporting Examples from DBS and UOB

DBS applied derivatives heavily in 2022, leading to a numerous spike in foreign exchange derivatives assets on liabilities, rising nearly doubling, referring to a growth in coverage and possibly in the risk of incurred hedging costs that act as a potential threat to financial performance.

UOB in the last year saw its reserves grow using deposits of customers and few swaps of currencies, which proves it runs a conservatory strategy, oriented at stability and not at maximum profits. Yet, this could be because of a smaller ability to take advantage of favourable market movements, which in turn could limit the income growth from foreign exchange transactions.

Finally, the hedging approach of DBS and UOB serves to effectively minimise currency fluctuations, though it poses higher costs, complexity, and a possible reduction in profits. To provide a good balance between the advantages and costs of hedging of the risks, these should be monitored carefully.

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