5. A U.S.-based commercial bank has the following assets and liabilities.

Assets Liabilities

$200 M 1-year U.S. loans (made in U.S. dollars) $300 M 1-year U.S. CDs (made in dollars)

$500 M equivalent 1-year Japanese loans (made in yen) $400 M 1-year Japanese CDs (made in yen)

a. Explain the bank's Asset position is net long or net short in yen ?

b.Is the bank more likely to be concerned about the appreciation or depreciation of the yen relative to the U.S dollar? Why?

c. How could the bank arrange an on-balance-sheet hedge for its foreign exchange rate risk? Be sure to explain how the hedge helps the bank address its risk in your response.

6. A U.S.-based insurance company invested $6,750,000 in a Euro-denominated security when the exchange rate was $1.22/. The exchange rate is now $1.08/

a. Explain whether the U.S. dollar has appreciated or depreciated against the euro.

b. Calculate the return on the investment for the insurance company based only on the change in the exchange rate.

7. A U.S.-based insurance company owns aMex$10,000,000 corporate bond and has of Mex$4,000,000 of claims reserves. It has also bought Mex$200,000 and sold Mex$3,000,000. The current exchange rate is $0.059/Mex$.

a. Calculate the bank's dollar net exposure to Mexican pesos. Note that your answer should be in U.S. dollars.

b. If the dollar-per-Mexican peso exchange rate decreases by 11%, what is the bank's dollar expected gain or loss? c. What position in a forward contract based on Mexican pesos could the insurance company take to hedge its foreign exchange rate risk? Be sure to explain how this position will hedge the insurance company's risk in your response.

Answer rating: 100% (QA)

a The banks asset position is net long in yen This is because the bank has 500 million equivalent 1year Japanese loans which means it has assets denominated in yen that exceed its liabilities denomina... View the full answer