Effects of Short-run and Long-run Changes in Foreign Exchange Rates on Banks' Profit

Abstract

In this article, we have planned to examine the effects of foreign exchange changes on Banks' operations andprofits by applying Error Correction Model (ECM) both in short-run and long-run periods. Data of exchange rates,foreign exchange positions, foreign exchange resources and profits have been drawn from the balance sheets andstatements of profit and loss in one of the commercial banks in Iran for the period of five years from 2006 to 2010.The results indicate that short-run increase in exchange rate has a reaction over the expected level, whilst the profitis over the equilibrium rate of exchange in long-run. Meantime, there is a significant, stationary model for thebahaviour of exchange rate both in short-run and long-run towards Banks' profit. In general, based on the result ofthe present research, we can come to this conclusion that despite non-stationarity of exchange rate and foreignexchange profit, there is a co-integration between these two variables. Meanwhile, there is a significant, stationarymodel for the short- and long-run behaviour of exchange rate and its effects on bank foreign exchange profit. Inaddition, the effect of exchange rate changes on foreign exchange profit in short-run is more than the one inlong-run. Finally, error correction coefficient is 1.23 and the required time to reach long-run equilibrium would be4, when short- and long-run equilibriums are overlapped.