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 Swiss franc/dollar exchange rate?
A)The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
B)The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
C)The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
D)The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
E)The FI has a balanced position in the Swiss franc.

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 Swiss franc/dollar exchange rate?
A)The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
B)The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
C)The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
D)The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
E)The FI has a balanced position in the Swiss franc.

Quizplus · Accepted Answer

The FI's net position in Swiss francs is calculated by taking the difference between assets and liabilities and adding the net FX position (FX Bought - FX Sold). For Swiss francs, this is (10,200 - 9,800) + (8,000 - 10,800) = 400 - 2,800 = -2,400. A negative number indicates a net short position, meaning the FI has sold more francs than it has bought. Therefore, it faces the risk that the franc will appreciate (rise in value) against the U.S. dollar, as it would cost more to cover the short position.

The Following Are the Net Currency Positions of a U