A financial institution with a negative net exposure in foreign currency i faces the risk of foreign currency i ________________ against the domestic currency.

Question

A financial institution with a negative net exposure in foreign currency i faces the risk of foreign currency i ________________ against the domestic currency.

BlackTom AI · Accepted Answer

A financial institution with a negative net exposure in foreign currency i is effectively short that currency, so it faces the risk of foreign currency i appreciating against the domestic currency.

1. Relevant knowledge points and concepts
- Net exposure in a currency = foreign-currency assets − foreign-currency liabilities. A negative value means liabilities exceed assets (a net short position).
- Exchange rate convention here is domestic currency per unit of foreign currency (e.g., $/€). If the foreign currency appreciates, that rate rises and each unit of foreign currency costs more domestic currency.
- A net short position gains when the foreign currency weakens (depreciates) and loses when it strengthens (appreciates).

2. Step-by-step reasoning
- Negative net exposure implies the institution must ultimately buy foreign currency to settle more liabilities than it holds in that currency.
- If foreign currency i appreciates, each unit of that currency requires more domestic currency to purchase, increasing the domestic-currency cost of the institution’s net foreign liabilities.
- Therefore the institution is exposed to losses if foreign currency i strengthens.

3. Calculation example (intermediate steps)
- Suppose foreign assets = €100, foreign liabilities = €150 → net exposure = €100 − €150 = −€50.
- Current exchange rate = $1.10/€: domestic value of net = −€50 × $1.10 = −$55 (a $55 net liability).
- If € appreciates to $1.30/€: domestic value = −€50 × $1.30 = −$65 → larger loss (an additional $10 loss).

4. Why the correct answer is correct
- Appreciation of the foreign currency raises the domestic-currency amount needed to cover net foreign liabilities, so a negative net exposure directly leads to loss when the foreign currency appreciates.

5. Why other options are incorrect
- Depreciation of the foreign currency would reduce the domestic cost of foreign liabilities, benefiting (not harming) a negative net exposure. Stability would imply no change in risk realization. Thus “appreciating” is the correct specific risk.

6. Conclusion
The institution with negative net exposure faces the risk of foreign currency i appreciating against the domestic currency. This matches the provided correct answer: appreciating.

A financial institution with a negative net exposure in foreign currency i faces the risk of foreign currency i ________________ against the domestic currency.单项选择题

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