金融机构管理习题答案015.docx
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金融机构管理习题答案015.docx
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金融机构管理习题答案015
ChapterFifteen
ForeignExchangeRisk
ChapterOutline
Introduction
SourcesofForeignExchangeRiskExposure
∙ForeignExchangeRateVolatilityandFXExposure
ForeignCurrencyTrading
∙FXTradingActivities
∙TheProfitabilityofForeignCurrencyTrading
ForeignAssetandLiabilityPositions
∙TheReturnandRiskofForeignInvestments
∙RiskandHedging
∙InterestRateParityTheorem
∙MulticurrencyForeignAsset-LiabilityPositions
Summary
SolutionsforEnd-of-ChapterQuestionsandProblems:
ChapterFifteen
1.WhatarethefourFXrisksfacedbyFIs?
Thefourrisksinclude
(1)tradinginforeignsecurities,
(2)makingforeigncurrencyloans,(3)issuingforeigncurrency-denominateddebt,and(4)buyingforeigncurrency-issuedsecurities.
2.WhatisthespotmarketforFX?
WhatistheforwardmarketforFX?
Whatisthepositionofbeingnetlonginacurrency?
Thespotmarketforforeignexchangeinvolvestransactionsforimmediatedeliveryofacurrency,whiletheforwardmarketinvolvesagreementstodeliveracurrencyatalatertimeforapriceorexchangeratethatisdeterminedatthetimetheagreementisreached.Thenetexposureofaforeigncurrencyisthenetforeignassetpositionplusthenetforeigncurrencyposition.Netlonginacurrencymeansthattheamountofforeignassetsexceedstheamountofforeignliabilities.
3.X-IMBankhas¥14millioninassetsand¥23millioninliabilitiesandhassold¥8millioninforeigncurrencytrading.WhatisthenetexposureforX-IM?
Forwhattypeofexchangeratemovementdoesthisexposureputthebankatrisk?
Thenetexposurewouldbe¥14million–¥23million–¥8million=-¥17million.Thisnegativeexposureputsthebankatriskofanappreciationoftheyenagainstthedollar.Astrongeryenmeansthatrepaymentofthenetpositionwouldrequiremoredollars.
4.WhattwofactorsdirectlyaffecttheprofitabilityofanFI’spositioninaforeigncurrency?
Theprofitabilityisafunctionofthesizeofthenetexposureandthevolatilityoftheforeignexchangeratioorrelationship.
5.ThefollowingaretheforeigncurrencypositionsofanFI,expressedindollars.
CurrencyAssetsLiabilitiesFXBoughtFXSold
Swissfranc(SF)$125,000$50,000$10,000$15,000
Britishpound(£)50,00022,00015,00020,000
Japaneseyen(¥)75,00030,00012,00088,000
a.WhatistheFI’snetexposureinSwissfrancs?
NetexposureinSwissfrancs=$70,000.
b.WhatistheFI’snetexposureinBritishpounds?
NetexposureinBritishpounds=$23,000.
c.WhatistheFI’snetexposureinJapaneseyen?
NetexposureinJapaneseyen=-$31,000
d.WhatistheexpectedlossorgainiftheSFexchangerateappreciatesby1percent?
Ifassetsaregreaterthanliabilities,thenanappreciationoftheforeignexchangerateswillgenerateagain=$70,000x0.01=$7,000.
e.Whatistheexpectedlossorgainifthe£exchangerateappreciatesby1percent?
Gain=$23,000x0.01=$230
f.Whatistheexpectedlossorgainifthe¥exchangerateappreciatesby2percent?
Loss=-$31,000x0.02=-$6,200
6.WhatarethefourFXtradingactivitiesundertakenbyFIs?
HowdoFIsprofitfromtheseactivities?
WhatarethereasonsfortheslowgrowthinFXprofitsatmajorU.S.banks?
ThefourareasofFXactivityundertakenbyFIsareeitherfortheircustomer’saccountsorfortheirownproprietarytradingaccounts.TheyinvolvethepurchaseandsaleofFXinorderto(a)completeinternationalcommercialtransactions,(b)investabroadindirectorportfolioinvestments,(c)hedgeoutstandingcurrencyexposures,and(d)speculateagainstmovementsincurrencies.Mostbanksearncommissionsontransactionsmadeonbehalfoftheircustomers.Ifthebanksaremarketmakersincurrencies,theymaketheirprofitsonthebid-askspread.
AmajorreasonfortheslowgrowthinprofitshasbeenthedeclineinvolatilityofFXratesamongmajorEuropeancurrenciesthathasmorethanoffsettheincreasedvolatilityofFXratesamongAsiancurrencies.ThereducedvolatilityisrelatedtothereductionininflationratesintheEuropeancountriesandtherelativelyfixedexchangeratesthathaveprevailedastheEuropeancountriesmovetowardfullmonetaryunion.
7.CityBankissued$200millionofone-yearCDsintheU.S.atarateof6.50percent.Itinvestedpartofthismoney,$100million,inthepurchaseofaone-yearbondissuedbyaU.S.firmatanannualrateof7percent.Theremaining$100millionwasinvestedinaone-yearBraziliangovernmentbondpayinganannualinterestrateof8percent.TheexchangerateatthetimeofthetransactionwasBrazilianreal1/$.
a.Whatwillbethenetreturnonthis$200millioninvestmentinbondsiftheexchangeratebetweentheBrazilianrealandtheU.S.dollarremainsthesame?
Costoffunds=0.065x$200million=$13million
ReturnonU.S.loan=0.07x$100million=$7,000,000
ReturnonBrazilianbond=(.08xReal100m)/1.00=$8,000,000
Totalinterestearned=$15,000,000
Netreturnoninvestment=$15million-$13million/$200million=1.00percent.
b.Whatwillbethenetreturnonthis$200millioninvestmentiftheexchangeratechangestoreal1.20/$?
Costoffunds=0.065x$200million=$13,000,000
ReturnonU.S.loan=0.07x$100million=$7,000,000
ReturnonBrazilianbond=(0.08xReal100m)/1.20=$6,666,667
Totalinterestearned=$13,666,667
Netreturnoninvestment=$13,666,667-$13,000,000/$200,000,000=0.67percent.
ConsiderationshouldbegiventothefactthattheBrazilianbondwasforReal100million.Thus,atmaturitythebondwillbepaidbackforReal100million/1.20=$83,333,333.33.Therefore,thestrengtheningdollarwillhavecausedalossincapital($16,666,666.67)thatfarexceedstheinterestearnedontheBrazilianbond.
c.Whatwillbethenetreturnonthis$200millioninvestmentiftheexchangeratechangestoreal0.80/$?
Costoffunds=0.065x$200million=$13,000,000
ReturnonU.S.loan=0.07x$100million=$7,000,000
ReturnonBrazilianbond=(.08xReal100m)/0.80=$10,000,000
Totalinterestearned=$17,000,000
Netreturnoninvestment=$17,000,000-$13,000,000/$200,000,000=2.00percent.
ConsiderationshouldbegiventothefactthattheBrazilianbondwasforReal100million.Thus,atmaturitythebondwillbepaidbackforReal100million/0.80=$125,000,000.Therefore,thestrengtheningRealwillhavecausedagainincapitalof$25,000,000inadditiontotheinterestearnedontheBrazilianbond.
8.SunBankUSApurchaseda16millionone-yearEuroloanthatpays12percentinterestannually.ThespotrateforEurosis€1.60/$.SunBankhasfundedthisloanbyacceptingaBritishpound(£)-denominateddepositfortheequivalentamountandmaturityatanannualrateof10percent.ThecurrentspotrateoftheBritishpoundis$1.60/£.
a.Whatisthenetinterestincomeearnedindollarsonthisone-yeartransactionifthespotratesattheendoftheyearare€1.70/$and$1.85/£?
.Loanamount=€16million/1.60=$10million
Depositamount=$10m/1.60=£6,250,000
Interestincomeattheendoftheyear=€16mx0.12=€1.92/1.70=$1,129,411.77
Interestexpenseattheendoftheyear=£6,250,000x0.10=£625,000x1.85=$1,156,250
Netinterestincome=$1,129,411.77-$1,156,250.00=-$26,838.23
b.Whatshouldbethe£to$spotrateinorderforthebanktoearnanetinterestmarginof4percent?
Anetinterestmarginof4percentwouldimply$10,000,000x0.04=$400,000.
Thenetcostofdepositsshouldbe$1,129,411.77-400,000=$729,411.77.
Poundrate=$729,411.77/625,000=$1.1671/£.
Thus,thepoundshouldbesellingat$1.1671/£inorderforthebanktoearn4percent.
c.Doesyouranswertopart(b)implythatthedollarshouldappreciateordepreciateagainstthepound?
Thedollarshouldappreciateagainstthepound.Ittakesfewerdollarstobuyonepound.
d.Whatisthetotaleffectonnetinterestincomeandprincipalofthistransactiongiventheend-of-yearspotratesinpart(a)?
Interestincomeandloanprincipalatyear-end=(€16mx1.12)/1.70=$10,541,176.47
Interestexpenseanddepositprincipalatyear-end=(£6.25mx1.10)x1.85=$12,718,750
Totalincome=$10,541,176.47-$12,718,750.00=-$2,177,573.53
9.BankUSArecentlymadeaone-year$10millionloanthatpays10percentinterestannually.TheloanwasfundedwithaSwissfranc-denominatedone-yeardepositatanannualrateof8percent.ThecurrentspotrateisSF1.60/$.
a.Whatwillbethenetinterestincomeindollarsontheone-yearloanifthespotrateattheendoftheyearisSF1.58/$?
Interestincomeandloanprincipalatyear-end=$10mx0.10=$1,000,000.
Interestexpenseanddepositprincipalatyear-end=(SF16,000,000x0.08)/1.58
=SF1,280,000/1.58=$810,126.58.
Netinterestincome=$1,000,000-$810,810.58=$189,873.42.
b.Whatwillbethenetinterestreturnonassets?
Netinterestreturnonassets=$189,873.42/$10,000,000=0.0190or1.90percent.
c.HowfarcantheSFappreciatebeforethetransactionwillresultinalossforBankUSA?
Exchangerate=SF1,280,000/$1,000,000=SF1.28/$,appreciationof20.00percent.
d.Whatisthetotaleffectonnetinterestincomeandprincipalofthistransactiongiventheend-of-yearspotratesinpart(a)?
Interestincomeandloanprincipalatyear-end=$10mx1.10=$11,000,000.
Interestexpenseanddepositprincipalatyear-end=(SF16,000,000x1.08)/1.58
=SF17,280,000/1.58=$10,936,709.
Totalincome=$11,000,000-$10,936,709=$63,291.
10.WhatmotivatesFIstohedgeforeigncurrencyexposures?
Whatarethelimitationstohedgingforeigncurrencyexposures?
FIshedgeto
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