Explanation:
The net exposure = (10 - 7) + (5 - 6) = +2 GBP; i.e., the bank is net long pound sterling and faces the risk of GBP depreciation. To reduce the net long GBP exposure (which is vulnerable to depreciation), the bank should add GBP-denominated liabilities. Each of the answers (A), (B), and (D) increase the net long exposure to a greater net long exposure, which would not reduce the risk.
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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
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