14-62 How would you characterize the FI's risk exposure to fluctuations in the British pound to dollar exchange rate?
A)The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar.
B)The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar.
C)The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S.dollar.
D)The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S.dollar.
E)The FI has a balanced position in the British pound.

Question

Quizplus · Accepted Answer

The FI is net short in the British pound, which means that it has more liabilities denominated in British pounds than it has assets denominated in British pounds. If the British pound rises in value against the U.S. dollar, the FI will have to pay more U.S. dollars to settle its liabilities, which will result in a loss.

14-62 How Would You Characterize the FI's Risk Exposure to Fluctuations