Chapter 9, Problem 16P

a)

Summary Introduction

To determine: Net exposure stated in Country S francs.

Explanation of Solution

Given information:

An FI holds Country S francs of 134,394 foreign exchange assets and 53,758 in foreign exchange liabilities.

It has conducted foreign exchange trading and bought 10,752 and sold 16,127.

Calculation of net exposure in Sfs:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{Sf134,394}-\text{Sf53,758}+\text{Sf10,752}-\text{Sf16,127}\\ =\text{Sf75,261}\end{array}$

Hence, net exposure stated in Sfs is Sf75, 261

Calculation of net exposure in dollars:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{\$125,000}-\text{\$50,000}+\$\text{10,000}-\$\text{15,000}\\ =\$\text{70,000}\end{array}$

Hence, net exposure stated in dollars is $70,000

b)

Summary Introduction

To determine: Net exposure stated in Country B pound.

Explanation of Solution

Given information:

An FI holds Country B pounds of 30,488 foreign exchange assets and 13,415 in foreign exchange liabilities.

It has conducted foreign exchange trading and bought £9,146 and sold £12,195

Calculation of net exposure in pounds:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\pounds 30,488-\pounds 13,415+\pounds 9,146-\pounds 12,195\\ =\pounds 14,024\end{array}$

Hence, net exposure stated in pounds is £14,024

Calculation of net exposure in dollars:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{\$50,000}-\text{\$22,001}+\$\text{15,000}-\$20\text{,000}\\ =\$22,999\end{array}$

Hence, net exposure stated in dollars is $22,999

c)

Summary Introduction

To determine: Net exposure stated in Country J yen.

Explanation of Solution

Given information:

An FI holds Country J yens of 7,075,472 foreign exchange assets and 2,830,189 in foreign exchange liabilities.

It has conducted foreign exchange trading and bought ¥1,132,075 and sold ¥8,301,887

Calculation of net exposure in ¥:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\yen 7,075,472-\yen 2,830,189+\yen 1,132,075-\yen 8,301,887\\ =-\yen 2,924,529\end{array}$

Hence, net exposure stated in yen is -¥2,924,529

Calculation of net exposure in dollars:

$\begin{array}{c}\text{Net}\text{exposure}=\text{Foreign}\text{exchange}\text{assets}-\text{foreign}\text{exchange}\text{liabilities}\\ +\text{ foreign exchange bought}-\text{foreign exchange sold}\\ =\text{\$75,000}-\text{\$30,000}+\$\text{12,000}-\$88\text{,000}\\ =-\$31,000\end{array}$

Hence, net exposure stated in dollars is -$31,000

d)

Summary Introduction

To determine: Expected loss or gain when Sf exchange rate appreciated by 1%.

Explanation of Solution

Calculation of gain or loss:

When assets are greater than liabilities, then there arises a gain.

$\begin{array}{c}\text{Gain}=\text{SF}75,261\times 0.01\text{or}\$70,000\times 0.01\\ =\text{SF}7,261\text{or}\$7,000\end{array}$

Therefore, gain is SF7, 261 or $7,000

e)

Summary Introduction

To determine: Expected loss or gain when £ exchange rate appreciated by 1%.

Explanation of Solution

Calculation of gain or loss:

When assets are greater than liabilities, then there arises a gain.

$\begin{array}{c}\text{Gain}=\pounds 14,024\times 0.01\text{or}\$22,999\times 0.01\\ =\pounds 140\text{or}\$230\end{array}$

Therefore, gain is £140 or $230

f)

Summary Introduction

To determine: Expected loss or gain when ¥ exchange rate appreciated by 2%.

Explanation of Solution

Calculation of gain or loss:

$\begin{array}{c}\text{Loss}=-\yen 2,924,529\times 0.02\text{or}-\$31,000\times 0.02\\ =-\yen 58,491\text{or}-\$620\end{array}$

Therefore, gain is -¥58,491 or -$620