A financial institution has assets denominated in British pound sterling of $125 million and sterling liabilities of $100 million. a) What is the FI's net exposure? b) Is the FI exposed to a dollar appreciation or depreciation? c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currency risk exposure? e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's cash position? f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI's futures position.

A financial institution has assets denominated in British pound sterling of $125 million and sterling liabilities of $100 million. a) What is the FI's net exposure? b) Is the FI exposed to a dollar appreciation or depreciation? c) How can the FI use futures or forward contracts to hedge its FX rate risk? d) What is the number of futures contracts to be utilized to hedge fully the FI's currency risk exposure? e) If the British pound falls from $1.60/£ to $1.50/£, what will be the impact on the FI's cash position? f) If the British pound futures price falls from $1.55/£ to $1.45/£, what will be the impact on the FI's futures position.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

ChapterP1: Part 1: Integrative Problem: The International Financial Environment

Section: Chapter Questions

Problem 5Q

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