TUTORIAL FOR FOREIGN EXCHANGE RISK Problem 1. Bank has Euro 14 million in assets and Euro 23 million in liabilities and has sold Euro 8 million inforeign currency trading. What is the net exposure for the Bank? For what type of exchange ratemovement does this exposure put the bank at risk? Problem 2The following are the foreign currency positions of an FI, expressed in dollars.CurrencyAssetsLiabilitiesFX BoughtFX SoldEuro in $ equiv. $125,000$50,000$10,000$15,000a.What is the FI’s net exposure in Euro? b.Do you have Net Long or Net Short position in forex? What is your risk: appreciation ordepreciation of Euro? c.What is the expected loss or gain if the Euro exchange rate appreciates by 1%? Problem 3City Bank issued $200 million of one-year CDs in the U.S. at a rate of 6.50 percent. It investedpart of this money, $100 million, in the purchase of a one-year bond issued by a U.S. firm at anannual rate of 7 percent. The remaining $100 million was invested in a one-year Braziliangovernment bond paying an annual interest rate of 8 percent. The exchange rate at the time ofthe transaction was 1 Brazilian real /$.a.What will be the net return on this $200 million investment in bonds if the exchange ratebetween the Brazilian real and the U.S. dollar remains the same?
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- Fall '12
- Economics, Foreign exchange market, United States dollar, Forward contract, Swiss Franc