29. One of the traders whose risk you monitor put on a carry trade where he borrows in yen and invests in some emerging market bonds whose performance is independent of yen. Which of the following risks should you not worry about? [source: FRM 2010 practice exam]

• a.  Unexpected devaluation of the yen.
• b.  A currency crisis in one of the emerging markets the trader invests in.
• c.  Unexpected downgrading of the sovereign rating of a country in which the trader invests.
• d.  Possible contagion to emerging markets of a credit crisis in a major country.

[my adds]

29.2 A bank has $300 in FX assets and $200 in FX liabilities. The FI also has $230 in FX currency purchased and $380 in FX currency sold. What is the bank’s net FX exposure?

29.3 In Saunder’s central example, the bank’s assets of $200 million are 50% invested in US dollar-denominated loans and 50% invested in British pound sterling loans. Further, in the UNHEDGED scenario, the bank is funded by borrowing of $200 million in US dollars. Under purchasing power parity (PPP), what is the nature of the bank’s inflation risk?

29.4 In one sentence, describe Saunder’s ON-BALANCE SHEET hedge for the bank above.

29.5 In one sentence, describe Saunder’s OFF-BALANCE SHEET hedge for the bank above.

Answer:

• Here in forum

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