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Answer: The bank earns profits on the US dollar depreciation
**Correct answer: B** First compute the net USD exposure: \[ 5.0 - 3.0 + 2.5 - 5.7 = -1.2 \] The bank has a **negative USD exposure** (it is short USD). The exchange rate moves from **USD/JPY 80** to **USD/JPY 72**, so the **U.S. dollar depreciates against the yen**. A bank that is **short USD** benefits when USD weakens, because the yen value of its net USD position rises relative to what it owes. Therefore, the bank **earns profits on the USD depreciation**.
Author: Manit Arora
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Q-191.4. A Japanese bank (whose domestic currency is the yen, JPY) has the following positions in US dollars: $5.0 billion in assets, $3.0 billion in liabilities, $2.5 billion USD bought, and $5.7 billion USD sold. The bank is unhedged with respect to its USD exposure. If the exchange rate moves from USD/JPY 80.0000 to USD/JPY 72.0000, what is the impact on the bank?
A
The bank incurs losses on the US dollar depreciation (vis a vis the yen)
B
The bank earns profits on the US dollar depreciation
C
The bank incurs losses on the US dollar appreciation
D
The bank earns profits on the US dollar appreciation
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