Risk management measures of central banks for the foreign exchange reserve

The management of foreign exchange reserves is an important task undertaken by central banks. Based on the design of exchange rate arrangements and the requirements of monetary policy, foreign reserve assets may serve a variety of purposes, ranging from exchange rate management to external debt management. Hence central banks efficient and effective management of foreign reserves is vital if they are to fulfil their mandates comprehensively.

The prudent allocation and management of foreign reserves helps in maintaining the liquidity needed to fulfil policy mandates and also in minimising the costs of holding reserves. Central bank foreign reserves risk management can contribute to these objectives by managing and controlling the exposure to financial and operational risks

This paper makes an attempt to review the research work done on studying the risk management strategies of central banks for managing and neutralizing foreign exchange reserve.