Which of the following statements is true?
A) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates rise over the investment period.
B) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread if exchange rates fall over the investment period.
C) By directly matching its foreign asset and liability book, an FI can lock in a positive return on profit spread whichever direction exchange rates change over the investment period.
D) By directly matching its foreign asset and liability book, an FI holds a neutral position, i.e. earnings equalling zero, whichever direction exchange rates change over the investment period.

Question

Quizplus · Accepted Answer

By directly matching its foreign asset and liability book, an FI ensures a perfect hedge against exchange rate fluctuations, which means that the profits are locked in irrespective of which way the exchange rates move. Therefore, option C is the correct statement.

Which of the Following Statements Is True