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P1.T3.500. Foreign exchange (FX) exposures (Saunders)

Nicole Seaman

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Learning outcomes: Calculate a financial institution’s overall foreign exchange exposure. Explain how a financial institution could alter its net position exposure to reduce foreign exchange risk.


500.1. Below are spot exchange rates (on August 13th, 2015) for two currency pairs: EUR/USD and USD/CNY; CNY is the currency code for the Chinese yuan, the basic unit of the renminbi.

Please note that both of the above are given in the base/quote format, which is typical ("The first currency that is quoted in a currency pair is known as the base currency and the second is known as the counter currency," The Little Book of Currency Trading: How to Make Big Profits in the World of Forex, p. 36. Wiley. Kindle Edition.). Therefore, in EUR/USD the base currency is EUR and the quote (aka, price, counter) currency is USD, while in USD/CNY the base currency is USD and the quote currency is CNY.

What is the market-implied bid-ask on the EUR/CNY cross rate?

a. EUR/CNY is 0.1741/0.1741 (base/quote is bid/ask)
b. EUR/CNY is 5.7428/5.7434 (base/quote is bid/ask)
c. EUR/CNY is 7.1275/7.1293 (base/quote is bid/ask)
d. EUR/CNY is 8.6261/8.6270 (base/quote is bid/ask)

500.2. Recently China's central bank devalued the yuan against the US dollar. Consider the impact of a yuan devaluation on the following four groups:

I. Chinese exporters to the US
II. American tourists to China
III. A US bank that has invested abroad in China--but without hedging--by making yuan-denominated loans
IV. A US manufacturer that exports to China

Which of the group(s) benefits directly from an appreciation of the USD against the CNY?

a. None benefit from yuan depreciation
b. Only I. and II. benefit from yuan depreciation
c. Only III. and IV. benefit from yuan depreciation
d. All benefit from yuan depreciation

500.3. The following are the foreign currency positions of a U.S. bank, expressed in the foreign currency:

The spot exchange rates are currently as follows (all given in base/quote formate): USD/CHF 0.980, GPD/USD $1.56, and USD/JPY ¥125.0

If the Japanese yen appreciates by 2.0%, what is the bank's expected gain or loss (note: this is variation on Saunder's Question #8) in US dollar terms?

a. Loss
b. Loss of about $61.0 dollars
c. Gain of about
d. Gain

Answers here: