Chapter 9, Problem 16P

a)

Summary Introduction

To determine: Net exposure stated in Country S francs.

Explanation of Solution

Given information:

An FI holds Country S francs of 127,500 foreign exchange assets and 51,000 in foreign exchange liabilities.

It has conducted foreign exchange trading and bought 10,200 and sold 15,300.

Calculation of net exposure in Sfs:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{Sf127,500}-\text{Sf51,000}+\text{Sf10,200}-\text{Sf15,300}\\ =\text{Sf71,400}\end{array}$

Hence, net exposure stated in Sfs is Sf71, 400

Calculation of net exposure in dollars:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{\$125,000}-\text{\$50,000}+\$\text{10,000}-\$\text{15,000}\\ =\$\text{70,000}\end{array}$

Hence, net exposure stated in dollars is $70,000

b)

Summary Introduction

To determine: Net exposure stated in Country B pound.

Explanation of Solution

Given information:

An FI holds Country B pounds of 38,168 foreign exchange assets and 16,794 in foreign exchange liabilities.

It has conducted foreign exchange trading and bought £11,450 and sold £15,267

Calculation of net exposure in pounds:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\pounds 38,168-\pounds 16,794+\pounds 11,450-\pounds 15,267\\ =\pounds 17,557\end{array}$

Hence, net exposure stated in pounds is £17,557

Calculation of net exposure in dollars:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{\$50,000}-\text{\$22,001}+\$\text{15,000}-\$20\text{,000}\\ =\$22,999\end{array}$

Hence, net exposure stated in dollars is $22,999

c)

Summary Introduction

To determine: Net exposure stated in Country J yen.

Explanation of Solution

Given information:

An FI holds Country J yens of 7,869,885 foreign exchange assets and 3,147,954 in foreign exchange liabilities.

It has conducted foreign exchange trading and bought ¥1,259,181 and sold ¥9,233,998

Calculation of net exposure in ¥:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\yen 7,869,885-\yen 3,147,954+\yen 1,259,181-\yen 9,233,998\\ =-\yen 3,252,886\end{array}$

Hence, net exposure stated in yen is -¥3,252,886

Calculation of net exposure in dollars:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{\$75,000}-\text{\$30,000}+\$\text{12,000}-\$88\text{,000}\\ =-\$31,000\end{array}$

Hence, net exposure stated in dollars is -$31,000

d)

Summary Introduction

To determine: Expected loss or gain when Sf exchange rate appreciated by 1%.

Explanation of Solution

Calculation of gain or loss:

When assets are greater than liabilities, then there arises a gain.

$\begin{array}{c}\text{Gain}=\text{SF}71,400\times 0.01\text{or}\$70,000\times 0.01\\ =\text{SF}7,400\text{or}\$7,000\end{array}$

Therefore, gain is SF7, 400 or $7,000

e)

Summary Introduction

To determine: Expected loss or gain when £ exchange rate appreciated by 1%.

Explanation of Solution

Calculation of gain or loss:

When assets are greater than liabilities, then there arises a gain.

$\begin{array}{c}\text{Gain}=\pounds 17,557\times 0.01\text{or}\$22,999\times 0.01\\ =\pounds 176\text{or}\$230\end{array}$

Therefore, gain is £176 or $230

f)

Summary Introduction

To determine: Expected loss or gain when ¥ exchange rate appreciated by 2%.

Explanation of Solution

Calculation of gain or loss:

$\begin{array}{c}\text{Loss}=-\yen 3,252,886\times 0.02\text{or}-\$31,000\times 0.02\\ =-\yen 65,058\text{or}-\$620\end{array}$

Therefore, gain is -¥65,058 or -$620