Explanation:
Correct answer: B
First compute the net USD exposure:
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.
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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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