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Instructor’s Resource Manual t/a Financial Institutions Management2e by Lange, Saunders, Anderson, Thomson & Cornett 1 CHAPTER 14 FOREIGN EXCHANGE RISK Chapter outline Sources of Foreign Exchange Risk Exposure Foreign Exchange Rate Volatility and FX ExposureForeign Currency Trading FX Trading ActivitiesThe Profitability of Foreign Currency TradingForeign Asset and Liability Positions The Return and Risk of Foreign InvestmentsRisk and HedgingInterest Rate Parity TheoremMulticurrency Foreign Asset-Liability Positions
Instructor’s Resource Manual t/a Financial Institutions Management2e by Lange, Saunders, Anderson, Thomson & Cornett 2 Solutions for end-of-chapter questions QUESTIONS AND PROBLEMS 1. What are the four FX risks faced by FIs? 2.What is the spot market for FX? What is the forward market for FX? What is the position of being net long in a currency? 3.X-IM Bank has EUR 14 million in assets and EUR 23 million in liabilities and has sold EUR 8 million in foreign currency trading. What is the net exposure for X-IM? For what type of exchange rate movement does this exposure put the bank at risk? 4.What two factors directly affect the profitability of an FI’s position in a foreign currency?