A net short position exposes an FI to the risk that the foreign currency could rise in value against its domestic currency.

Question

Quizplus · Accepted Answer

A net short position means that the FI owes more of a foreign currency than it owns. If the value of the foreign currency increases, the FI will have to pay more in its domestic currency to fulfill its debt in the foreign currency, resulting in a loss. Therefore, a net short position exposes an FI to the risk of a foreign currency appreciating against its domestic currency.

A Net Short Position Exposes an FI to the Risk