The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $$\begin{array} { | l | l | r | r | r | }
\hline \text { Currency } & \text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \
\hline \text { British pound } & 24,600 & 70,000 & 170,400 & 321,000 \
\hline \text { Yen } & 31,000 & 20,400 & 250,000 & 220,000 \
\hline \text { Swiss franc } & 10,200 & 9,800 & 8,000 & 10,800 \
\hline
\end{array}$$ How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?
A)The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar.
B)The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar.
C)The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar.
D)The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar.
E)The FI has a balanced position in the Japanese yen.

Question

The following are the net currency positions of a U.S.FI (stated in U.S.dollars). $$\begin{array} { | l | l | r | r | r | } 
\hline \text { Currency } & \text { Assets } & \text { Liabilities } & \text { FX Bought } & \text { FX Sold } \
\hline \text { British pound } & 24,600 & 70,000 & 170,400 & 321,000 \
\hline \text { Yen } & 31,000 & 20,400 & 250,000 & 220,000 \
\hline \text { Swiss franc } & 10,200 & 9,800 & 8,000 & 10,800 \
\hline
\end{array}$$ How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate?
A)The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar.
B)The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar.
C)The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.dollar.
D)The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S.dollar.
E)The FI has a balanced position in the Japanese yen.

Quizplus · Accepted Answer

To determine the FI's net position in yen, we calculate the net assets (assets - liabilities + FX bought - FX sold). For yen, this is $31,000 - 20,400 + 250,000 - 220,000 = 40,600$. Since the result is positive, the FI is net long in yen, meaning it holds more yen assets than liabilities. Being net long in yen, the FI faces the risk that the yen will fall in value against the U.S. dollar, as this would decrease the value of its yen-denominated assets when converted back to U.S. dollars.

The Following Are the Net Currency Positions of a U