Question

Please  discuss the various types of international banking offices. Also, why does this process often lead to the creation of interest rate risk? What is interest rate risk? How can the company hedge this risk?

Answer 1

Types of international banking offices:

1. Correspondent Banks: Banks located in different countries establish accounts in another banks

2. Representative office: A small service facility staffed by parent bank personel that is desigend to assist MNC clients.

3. Foreign Branch: Operate like a local bank and legally part of parent company

4. Subsidiary Bank: Locally incorporated bank that is wholly owned or owned in major part by foreign parent

5. Affiliate Bank: only partially owned but not controlled by foreign parent

6. Offshore banking Center: country whose banking system is organized to permit external account beyond the normal scope of local economic activity.

Since interest rates are different in two seperate country that's why it leads to interest risk.

Interest rate risk arises from the fluctuation in interest rate by central bank of that country and some time also because of monetary policy of country.

Company can hedge this risk using derivative products like futures and forwards as well we swap.