Questions:
213.1. On its balance sheet a bank carries Euro-denominated assets of $100.0 million and Euro-denominated liabilities $70.0 million. Additionally, the bank holds LONG derivative positions of $50.0 million in the Euro currency; i.e., futures and forward contracts in foreign currency markets. What trade would give the bank zero net exposure to the Euro?
a. Short position of $80.0 million in Euro FX
b. Short position of $170.0 million in Euro FX
c. Long position of $20.0 million in Euro FX
d. Long position of $50.0 million in Euro FX
213.2. At the start of the year, a bank is funded with $200.0 million in dollar-denominated deposits which have a cost of funds (e.g., CD interest rates) of 1.0%. Immediately (at the start of the year), the bank invests $100.0 million in dollar-denominated loans (assets) that earn +6.0%. The other $100.0 million is converted into Euros, when the EUR/USD rate is $1.30 at the start of the year, and loaned where it successfully also earns +6.0% as a Euro-denominated asset. At the end of the year, the funds from these repaid European loans are repatriated. However, during the year, the Euro has depreciated by 10% to $1.17 (following Saunders, all rates are compounded annually). The bank was not hedged with respect to this currency exposure. If return on investment (ROI) is return on assets (ROA) minus cost of funds (COF), what is the bank's unhedged ROI on the deposits?
a. -0.30%
b. +1.11%
c. +2.90%
d. +5.25%
213.3. In regard to Saunders' foreign exchange (FX) risk, each of the following is true EXCEPT which is false?
a. If a bank is net short a foreign currency, its risk is that the foreign currency will appreciate against the domestic currency
b. The difference between the nominal interest rate and the expected rate of inflation is the real interest rate
c. An on-balance-sheet hedge which matches foreign assets with liabilities (e.g., $100 million exposure in each of deposits and liabilities) will eliminate the volatility of ROI and net return
d. An example of an off-balance-sheet FX hedge is the sale forward (at a forward exchange rate) expected future foreign proceeds in exchange for receipt of domestic currency
Answers:
213.1. On its balance sheet a bank carries Euro-denominated assets of $100.0 million and Euro-denominated liabilities $70.0 million. Additionally, the bank holds LONG derivative positions of $50.0 million in the Euro currency; i.e., futures and forward contracts in foreign currency markets. What trade would give the bank zero net exposure to the Euro?
a. Short position of $80.0 million in Euro FX
b. Short position of $170.0 million in Euro FX
c. Long position of $20.0 million in Euro FX
d. Long position of $50.0 million in Euro FX
213.2. At the start of the year, a bank is funded with $200.0 million in dollar-denominated deposits which have a cost of funds (e.g., CD interest rates) of 1.0%. Immediately (at the start of the year), the bank invests $100.0 million in dollar-denominated loans (assets) that earn +6.0%. The other $100.0 million is converted into Euros, when the EUR/USD rate is $1.30 at the start of the year, and loaned where it successfully also earns +6.0% as a Euro-denominated asset. At the end of the year, the funds from these repaid European loans are repatriated. However, during the year, the Euro has depreciated by 10% to $1.17 (following Saunders, all rates are compounded annually). The bank was not hedged with respect to this currency exposure. If return on investment (ROI) is return on assets (ROA) minus cost of funds (COF), what is the bank's unhedged ROI on the deposits?
a. -0.30%
b. +1.11%
c. +2.90%
d. +5.25%
213.3. In regard to Saunders' foreign exchange (FX) risk, each of the following is true EXCEPT which is false?
a. If a bank is net short a foreign currency, its risk is that the foreign currency will appreciate against the domestic currency
b. The difference between the nominal interest rate and the expected rate of inflation is the real interest rate
c. An on-balance-sheet hedge which matches foreign assets with liabilities (e.g., $100 million exposure in each of deposits and liabilities) will eliminate the volatility of ROI and net return
d. An example of an off-balance-sheet FX hedge is the sale forward (at a forward exchange rate) expected future foreign proceeds in exchange for receipt of domestic currency
Answers:
