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Answer: Risk is appreciation of the Swiss franc against the Euro; off-balance-sheet hedge is sell forward (deliver) EUR in exchange for receiving CHF
The Swiss bank has a **EUR asset** funded with **CHF liabilities**. If the **Swiss franc appreciates against the euro** (equivalently, the euro depreciates against the franc), the CHF value of the EUR asset falls while the CHF liability remains fixed. That is the currency risk. ### Off-balance-sheet hedge To hedge that exposure, the bank would typically: - **sell EUR forward** - and receive CHF in the future This locks in the CHF value of the EUR asset and reduces FX risk. So the correct choice is **C**.
Author: Manit Arora
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Question-193.4. A Swiss bank raises CHF 200 million Swiss francs (liabilities) in order to fund half into a domestic investment (asset) of CHF 100 million and the rest in Eurozone investment (asset in EUR). What is the Swiss bank’s un-hedged currency risk, and how could the Swiss bank manage this exposure with an OFF-BALANCE-SHEET hedge?
A
Risk is depreciation of the Swiss franc against the Euro; off-balance-sheet hedge is sell forward (deliver) EUR in exchange for receiving CHF
B
Risk is depreciation of the Swiss franc against the Euro; off-balance-sheet hedge is sell forward (deliver) CHF in exchange for receiving EUR
C
Risk is appreciation of the Swiss franc against the Euro; off-balance-sheet hedge is sell forward (deliver) EUR in exchange for receiving CHF
D
Risk is appreciation of the Swiss franc against the Euro; off-balance-sheet hedge is sell forward (deliver) CHF in exchange for receiving EUR
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