Explanation:
Correct answer: C
Compute the current net GBP exposure:
So the bank has a +2 billion long GBP exposure.
If GBP depreciates, a long GBP position loses value. To reduce exposure to GBP depreciation, the bank should reduce its long position by 2 billion.
Therefore C is the correct hedging action.
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Q-191.5. A US bank has the following pound sterling exposures: GBP 10.0 billion in assets, GBP 7.0 billion in liabilities, GBP 5.0 billion bought, GBP 6.0 billion sold. The bank is concerned that the pound sterling will fall in value relative to the US dollar. Which of the following will reduce the bank’s exposure to pound sterling depreciation?
A
Nothing, its net exposure implies a benefit if GBP depreciates
B
Add +2 billion in assets to the balance sheet that are denominated in pound sterlings
C
Add +2 billion in liabilities to the balance sheet that are denominated in pound sterlings
D
Add +2 billion in long forward exposure to the pound sterling; i.e., promises to buy GBP in the future