A financial institution has assets denominated in British pound sterling of $125 million and sterling liabilities of $100 million. a) What is the FI's net exposure? b) Is the FI exposed to a dollar appreciation or depreciation? c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currency risk exposure? e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's cash position? f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI's futures position.
A financial institution has assets denominated in British pound sterling of $125 million and sterling liabilities of $100 million. a) What is the FI's net exposure? b) Is the FI exposed to a dollar appreciation or depreciation? c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currency risk exposure? e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's cash position? f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI's futures position.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
A financial institution has assets denominated in British pound sterling of $125 million and
sterling liabilities of $100 million.
a) What is the FI's net exposure?
b) Is the FI exposed to a dollar appreciation ordepreciation ?
c) How can the FI use futures or forward contracts to hedge its FX rate risk?
sterling liabilities of $100 million.
a) What is the FI's net exposure?
b) Is the FI exposed to a dollar appreciation or
c) How can the FI use futures or forward contracts to hedge its FX rate risk?
d) What is the number of futures contracts to be utilized to hedge fully the FI's currency
risk exposure?
e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's
cash position?
f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact
on the FI's futures position.
risk exposure?
e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's
cash position?
f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact
on the FI's futures position.
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