solution

An FI has assets denominated in UK pound sterling of A$125 million and sterling liabilities of A$100 million.

a. What is the FI’s net exposure?

b. Is the FI exposed to an A$ appreciation or depreciation?

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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 UK pound falls from $1.60/£ to $1.50/£ what will be the impact on the FI’s cash position?

f. If the UK pound futures price falls from $1.55/£ to $1.45/£ what will be the impact on the FI’s futures position?

g. Using the information in parts (e) and (f), what can you conclude about basis risk?

 
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