Consider a FI with a bond portfolio comprised of sovereign country debt that has both interest rate and exchange rate risk exposure. The duration of assets is 3.4 years and the duration of liabilities is 5.2 years. The portfolio has assets of US$18 billion (including 2.5 billion euro) and liabilities of US$16 billion (including 4.15 billion euro) with no other currencies bought or sold forward.

What is the foreign exchange rate risk of the bond portfolio?

a. Long 2.5 billion euro – exposed to euro/US dollar exchange rate declines.

b. Short 1.65 billion euro – exposed to euro/US dollar exchange rate declines.

c. Short 1.65 billion euro – exposed to euro/US dollar exchange rate increases.

d. Short 2.5 billion euro – exposed to euro/US dollar exchange rate increases.

e. Short 4.15 billion euro – exposed to euro/US dollar exchange rate increases.

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Basically let us fist understand that the question is focusing only on the exchange rate risk which is affected by the currency exchange rates Now we ... View the full answer