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P1.T3.501. Foreign exchange (FX) gain and loss (Saunders)

Nicole Seaman

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Learning objectives: Explain how a financial institution could alter its net position exposure to reduce foreign exchange risk. Calculate a financial institution’s potential dollar gain or loss exposure to a particular currency. Identify and describe the different types of foreign exchange trading activities.


500.1. The current EURUSD spot exchange rate is $1.1111 and the one-year forward exchange rate is $1.2240; i.e., EUR is the base rate and USD is the quote rate. If you convert $500,000 U.S. dollars to euros in the spot foreign exchange market and purchase a one-year forward contract to convert euros into dollars, which is nearest to the effective annual return?

a. -1.50%
b. 2.08%
c. 5.79%
d. 10.16%

500.2. A bank has the following currency positions in the Brazilian real, expressed in Brazilian real ($R):
  • Assets = R$ 125,000
  • Liabilities = R$ 78,000
  • FX Bought = R$ 27,000
  • FX Sold = R$ 5,000
The spot exchange rate USDBRL is $R 3.497 (i.e., USD is the base currency). If the Brazilian real depreciates by 3.0%, approximately what is the gain (loss) on the currency position expressed in US dollars?

a. Loss of $3,365
b. Loss of $592
c. Gain of $1,270
d. Gain of $4,822

500.3. City Bank issued $200.0 million of one-year CDs in the United States at a rate of 3.50%. It invested part of this money, $100.0 million, in the purchase of a one-year bond issued by a U.S. firm at an annual rate of 4.0%. The remaining $100.0 million was invested in a one-year Brazilian government bond paying an annual interest rate of 5.0%. The exchange rate at the time of the transaction was USDBRL R$ 3.5000. If the Brazilian real appreciates (against the dollar) from R$ 3.5000 to R$ 3.0000, what is the net return on this $200.0 million investment? (note: variation on Saunders' Question #10).

a. +3.470%
b. +5.833%
c. +9.750%
d. +12.930%

Answers here: