20.16.2. Imagine a bank that seeks to diversify internationally, or expand its presence in a specific market abroad. This bank will have to finance a particular portfolio of loans and securities, some of which are denominated in foreign currencies; for example, a German bank’s investment in US dollar-denominated structured finance products. The bank can finance these foreign currency positions in three ways:

I. The bank can borrow domestic currency, and convert it in a straight FX spot transaction to purchase the foreign asset in that currency.
II. The bank can also use FX swaps to convert its domestic currency liabilities into foreign currency and purchase the foreign assets.
III. The bank can borrow foreign currency, either from the interbank market, from non-bank market participants, or from central banks

Which option significantly exposes the bank to currency risk?