Indices of exchange rate effects in the international investment position
A notable percentage of the financial assets and liabilities in Germany’s international investment position (i.i.p.) are denominated in a foreign currency. Exchange rate movements therefore have a major impact on the performance of the i.i.p. A specific index concept allows us to assess how the market value of external assets and external debt changes solely as a result of exchange rate movements.
The indices of i.i.p.-weighted exchange rate effects (IIE) are based on the currency composition of the international investment position. They show the impact of exchange rate changes on the assets and liabilities side of the international investment position as a whole as well as on individual categories of assets and sectors.
An increase in the IIE represents a stock-weighted depreciation of the euro and entails an increase in the market value of the asset or debt levels after conversion into the single currency. Conversely, an appreciation of the euro results in a decline in the IIE and in the market values of assets and debt.
The IIE allow exchange rate-related wealth effects, which the i.i.p. would only show with a lag of three months, to be approximated in a timely manner based on current exchange rates. Sensitivity analyses can be used to identify individual sectors which would, in certain scenarios, be majorly affected by (assumed) changes in the prices of individual currencies. In addition, methods for analysing time series can be applied to the indices, for example to measure the exchange rate-related volatility of the market value of individual asset holdings.