Which of the following statements is true for an FI that holds €200,000 in assets and €250,000 in liabilities?
A)The FI faces the risk that the euro will fall in value against domestic currency.
B)The FI faces the risk that the euro will rise in value against domestic currency.
C)The FI has net foreign assets of €200,000.
D)The FI has net foreign assets of €50,000.

Question

Quizplus · Accepted Answer

The FI actually faces the risk that the euro will rise in value against the domestic currency because it has more liabilities (€250,000) denominated in euros than assets (€200,000). If the euro appreciates, the value of its liabilities in terms of the domestic currency will increase more than the value of its assets, potentially leading to losses.

Which of the Following Statements Is True for an FI