Explanation:
In moving from USD/JPY 80.0000 to USD/JPY 72.0000, the US dollar is the base currency, and it weakens (while the yen strengthens; it takes fewer yen to buy one dollar). The Japanese bank is NET SHORT the US dollar: (5 - 3) + (2.5 - 5.7) = -1.2 USD net exposure. If the bank is net short the foreign currency, it faces the risk that the dollar will rise; conversely, it profits from the dollar weakening.
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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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