Explanation:
As the bank is net invested in ruble-denominated assets, the bank is long the Russian ruble. Per PPP, inflation in Russia should lead to depreciation of the Russian ruble, which will create a loss on the long currency position.
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Q-194.1. A US bank raises USD $10 million (liabilities) and invests this amount into a Russian project denominated in Russian rubles (asset) with an expected foreign rate of return of 12%. The bank remains unhedged with respect to this currency risk. If there is a sudden increase in the Russian inflation rate, without any corresponding impact on the project's nominal, foreign 12% return on the project, according to purchasing power parity (PPP), what is the impact on the bank?
A
No impact
B
Ruble should appreciate, translating into a gain for the bank
C
Ruble should depreciate, translating into a gain for the bank
D
Ruble should depreciate, translating into a loss for the bank
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