Exam 13: Foreign Exchange Risk

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 Swiss franc/dollar exchange rate?

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities.

On May 31, 2016, the exchange rate of U.S.dollars for Bitcoins was Ƀ535.592.Three months later on August 31, 2016, the exchange rate was Ƀ572.187.If a Learjet 85 carries a price of $21 million, what is the difference in price a purchaser would pay in Bitcoins if the jet were purchased on August 31 rather than May 31, 2016?

FX trading risk exposure continues into the night until all FI operations are closed.

The total FX risk for a domestic bank that is making a one-year loan in a foreign currency is that the interest income expected on the loan is exposed to a depreciation of the foreign currency.

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. What is the spread earned by the bank at the end of the year if the exchange rate remains at €1.75/$?

Purchasing power parity is based on the difference in productive output (GDP) that exists between two countries.