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, that is, 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, a financial institution (FI) can lock in a positive return on profit spread regardless of the direction of exchange rate movements. This is because the gains or losses on assets will be offset by equal and opposite changes in liabilities, leaving the profit spread unaffected by exchange rate fluctuations.

Which of the Following Statements Is True