The following are the net currency positions of a U.S.FI (stated in U.S.dollars). \[\begin{array} { | l | l | r | r | r | } \hline \text { Currency } & \text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \\ \hline \text { British pound } & 24,600 & 70,000 & 170,400 & 321,000 \\ \hline \text { Yen } & 31,000 & 20,400 & 250,000 & 220,000 \\ \hline \text { Swiss franc } & 10,200 & 9,800 & 8,000 & 10,800 \\ \hline \end{array}\] How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

A) The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. B) The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. C) The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. D) The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. E) The FI has a balanced position in the Japanese yen. A) The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. B) The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. C) The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar. D) The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar. E) The FI has a balanced position in the Japanese yen.

Exam 13: Foreign Exchange Risk

Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently, spot exchange rates are US $0.78493 per Canadian dollar. What is the end of year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.538 percent and the exchange rate falls to US $0.765 per Canadian dollar? (Assume no change in U.S.interest rates.)

(Multiple Choice)

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Question 21

The Federal Reserve estimates that _ financial institutions are active market makers in foreign currencies in the U.S., of which _ are commercial and investment banks.

(Multiple Choice)

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Question 22

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.

(True/False)

4.8/5

(36)

Question 23

Which of the following is an example of interest rate parity?

(Multiple Choice)

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Question 24

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). Currency Assets Liabilities FX Bought FX Sold British pound 24,600 70,000 170,400 321,000 Yen 31,000 20,400 250,000 220,000 Swiss franc 10,200 9,800 8,000 10,800 How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

(Multiple Choice)

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Question 25

The market in which foreign currency is traded for immediate delivery is the

(Multiple Choice)

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(33)

Question 26

The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.

(True/False)

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Question 27

The decline in European FX volatility during the last decade has been offset in part by

(Multiple Choice)

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(36)

Question 28

The one-year CD rates for financial institutions with AA ratings are 5 percent in the U.S.and 8 percent in France.An AA-rated U.S.financial institution can borrow by issuing CDs or lend by purchasing CDs at these rates in either market.The current spot rate is $0.20/Euro. If the bank receives a quote of $0.1975/€ for one-year forward rates for the Euro (to buy and to sell), what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount?

(Multiple Choice)

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(34)

Question 29

Cross-currency exchange rates for all countries are listed at Bloomberg's website: www.bloomberg.com/markets/currencies/fxc.html.

(True/False)

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(33)

Question 30

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

(True/False)

4.7/5

(29)

Question 31

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI

(Multiple Choice)

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(40)

Question 32

The market in which foreign currency is traded for future delivery is the forward foreign exchange market.

(True/False)

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(40)

Question 33

A forward exchange transaction is the exchange of currencies at a specified exchange rate which is settled at some specified date in the future.

(True/False)

4.8/5

(40)

Question 34

An immediate exchange of currencies occurs in the spot foreign exchange market.

(True/False)

4.8/5

(37)

Question 35

An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent.It has invested these proceeds in one-year Euro (€) bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$.Both interest and principal are paid at the end of the year. Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months.The current LIBOR rate is 5 percent.Assume both interest and principal will be reinvested in six months.Assume the exchange rate remains at €1.75/$ at the end of the year.What should be the LIBOR rates in six months in order for the bank to earn a 1 percent spread?

(Multiple Choice)

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Question 36

FX risk exposure of an FI essentially relates to which of the following activities?

(Multiple Choice)

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(31)

Question 37

Violation of the interest rate parity theorem would allow arbitrage profits.

(True/False)

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Question 38

Since forward contracts are negotiated over-the-counter and the parties have maximum flexibility when setting the terms and conditions, credit and counterparty risk does not exist.

(True/False)

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(36)

Question 39

An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent.It has invested these proceeds in one-year Euro (€) bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$.Both interest and principal are paid at the end of the year. Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in variable rates of LIBOR + 1.5 percent, reset every six months.The current LIBOR rate is 5 percent.LIBOR at the end of six months is 5.5 percent.Assume both interest and principal will be reinvested in six months.Assume the spot exchange rate is €1.75/$.What should be the one-year forward rate in order for the bank to earn a spread of 1 percent?

(Multiple Choice)

4.8/5

(38)

Question 40

Showing 21 - 40 of 107

Exam 13: Foreign Exchange Risk

The Federal Reserve estimates that _______ financial institutions are active market makers in foreign currencies in the U.S., of which _______ are commercial and investment banks.

The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.

Which of the following is an example of interest rate parity?

The market in which foreign currency is traded for immediate delivery is the

The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.

The decline in European FX volatility during the last decade has been offset in part by

Cross-currency exchange rates for all countries are listed at Bloomberg's website: www.bloomberg.com/markets/currencies/fxc.html.

Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.

When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI

The market in which foreign currency is traded for future delivery is the forward foreign exchange market.

A forward exchange transaction is the exchange of currencies at a specified exchange rate which is settled at some specified date in the future.

An immediate exchange of currencies occurs in the spot foreign exchange market.

FX risk exposure of an FI essentially relates to which of the following activities?

Violation of the interest rate parity theorem would allow arbitrage profits.

Since forward contracts are negotiated over-the-counter and the parties have maximum flexibility when setting the terms and conditions, credit and counterparty risk does not exist.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

The Federal Reserve estimates that _ financial institutions are active market makers in foreign currencies in the U.S., of which _ are commercial and investment banks.