Exam 13: Foreign Exchange Risk

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/$?

The reason an FI receives a fee when purchasing foreign currencies to allow customers to complete international transactions is because the FI assumes some FX risk.

Suppose that the current spot exchange rate of Canadian dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the Canadian price index increases by 3 percent. According to PPP, the 8 percent rise in the price of Russian goods relative to the 3 percent rise in the price of Canadian goods results in a(n)

A positive net exposure position in FX implies an FI has purchased more foreign currency than it has sold.

The following are the net currency positions of a U.S. FI (stated in U.S. dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms. What is the FI's total FX investment?

The following are the net currency positions of a Canadian FI (stated in Canadian dollars). How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

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?

The following are the net currency positions of a U.S. FI (stated in U.S. dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms. How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate?

Profits in foreign exchange trading have grown despite the decreased volatility in FX rates in European countries.

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

FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.

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

The spot foreign exchange market is where forward and futures contracts and swap agreements are transacted.

The nominal interest rate is equal to the

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?

Most profits or losses on foreign trading come from taking an open position in currencies.

The following are the net currency positions of a U.S. FI (stated in U.S. dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms. What is the portfolio weight of the Euro in this FI's portfolio of foreign currency?

According to purchasing power parity (PPP), foreign currency exchange rates between two countries adjust to reflect changes in each country's

The following are the net currency positions of a U.S. FI (stated in U.S. dollars). Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms. How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?

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. At what one-year forward rate will the bank earn a 1 percent spread?