Explanation:
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.
To hedge that exposure, the bank would typically:
This locks in the CHF value of the EUR asset and reduces FX risk.
So the correct choice is C.
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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