Balance sheet of an FI on U. S. dollars market.

Use the following balance sheet of an FI to answer questions 1 – 10. The numbers provided are in millions of U.S. dollars unless otherwise noted and reflect market values:

 

Cash                                                                       15           Demand Deposits                                                175

 

                                                                                               

 

                Commercial Loans                                            175         Mexican Peso Denominated CDs                     75

(mature in  3.0 years)                                                          (par = MXN1125)

(par value = $175)                                                               (currently MXN12.8794/$1.00)

                (interest paid quarterly at 6.5%)                                       (interest paid annually at 2.50%)

Mexican Peso Zero Coupon Bonds               110        (mature in 5.0 years)

(mature in 15.0 years)

(par value = MXN1650)

(currently MXN12.8794/$1.00)                                        Subordinated Debt                                             150

Mortgage Loans – Fixed Rate                         155         (mature in 20 years)

(mature in 15 years)                                                            (amortize quarterly at 4.05%)

                (amortize quarterly at 5.75%)

                                                                                                                Equity                                                                     55

 

___                                                                                         ___

               

TOTAL ASSETS                                              455           TOTAL LIABILITY & EQUITY                 455

 

Now assume that market interest rates increase instantaneously by 5 basis points for all affected assets and liabilities.

 

  1. How would you characterize the FI’s risk exposure to fluctuations in the MXN/dollar exchange rate?
  2. The FI is net short in the MXN and therefore faces the risk that the MXN will rise in value against the U.S. dollar.
  3. The FI is net short in the MXN and therefore faces the risk that the U.S. dollar will fall in value against the MXN.
  4. The FI is net long in the MXN and therefore faces the risk that the U.S. dollar will rise in value against the MXN.
  5. Both a and b are correct.
  6. None of the above is correct.

 

  1. Now assume that the FX exchange rate changes to $1.00/MXN14.575 at the same time that interest rates change. Which of the following is most correct?
  2. The MXN depreciated in value against the US dollar, and the firm loses equity value due to its FX exposure.
  3. The MXN appreciated in value against the US dollar, and the firm loses equity value due to its FX exposure.
  4. The MXN depreciated in value against the US dollar, and the firm gains equity value due to its FX exposure.
  5. The MXN appreciated in value against the US dollar, and the firm gains equity value due to its FX exposure.
  6. None of the above is correct.
  7. Now assume that the FX exchange rate changes to $1.00/MXN14.575 at the same time that interest rates change, what is the new market value of the Mexican Peso (MXN) denominated deposits in MXNs?
  8. 641393
  9. 721768
  10. 829192
  11. 795196
  12. 493572
  13. What is the new market value of commercial loans?
  14. What is the new market value of the mortgage loans?
  15. What is the new market value of the subordinated debt?
  16. Now assume that the FX exchange rate changes to $1.00/MXN14.575 at the same time that interest rates change. What is the new market value of assets?

 

 

  1. Now assume that the FX exchange rate changes to $1.00/MXN14.575 at the same time that interest rates change. What is the capital gain/loss of the MXN denominated CDs associated with only FX risk only?
  2. + 12.054793%
  3. + 11.607607%
  4. + 12.474796%
  5. + 11.581668%
  6. + 11.893632%
  7. The answer must be a capital loss.
  8. None of the above is correct.
  9. Now assume that the FX exchange rate changes to $1.00/MXN14.575 at the same time that interest rates change. What is the capital gain/loss of the MXN denominated CDs associated with only IRR risk only?
  10. – 0.223593%
  11. – 0.446564%
  12. – 0.590332%
  13. – 0.668916%
  14. – 0.719555%
  15. The answer must be a capital gain.

 

  1. Now assume that the FX exchange rate changes to $1.00/MXN14.575 at the same time that interest rates change.  What is the new market value of equity?

 

 

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