A Canadian bank has fixed-rate assets in Canadian dollars and variable-rate liabilities in Euros. This bank is exposed to

Question

Quizplus · Accepted Answer

A fixed-rate asset appreciates in value when interest rates decline, leading to a decrease in the bank's income. Meanwhile, a variable-rate liability appreciates in value when interest rates increase, increasing the bank's liabilities. Additionally, since the bank's liabilities are in Euros and its assets are in Canadian dollars, a depreciation of the Canadian dollar would also increase the bank's liabilities. Therefore, the bank is exposed to interest rate increases and a depreciation of the Canadian dollar (option C).

A Canadian Bank Has Fixed-Rate Assets in Canadian Dollars and Variable-Rate