Question

A Spanish commercial bank is engaged in the following foreign
lending/borrowing and trading activities in U.S dollar:
a) The bank owns $5,000,000 value of corporate bonds in U.S
company
b) The bank has lent an U.S. company an amount of $16,000,000
c) The bank has borrowed $8,000,000 from a American bank
d) The bank has sold $300,000 to a Spanish customer to facilitate
acquisition of raw materials from U.S supplier.
e) The bank has purchased $4,000,000 from Spanish investor who
received dividends on stockholding in corporation in U.S.A.

Required:
a. Find the net foreign exchange exposure of the bank.
b. Does the bank have long or short position in U.S Dollar?

URGENT PLEASE

Answer 1

The net foreign exhange exposure of the bank is given by the formula= Net Foreign Asset - Net Foreign Liabilities

Therefore :

Foreign Asset	Amount	Foreign Liabilities	Amount
Corporate Bonds	5000000	Borrowing from American Bank	8000000
Lent to US Company	16000000	Purchased from Spanish Investor	4000000
Lent Spanish Customer	3000000
Total Asset	24000000	Total Liabilities	12000000

Net Foreign Exchange Exposure= 24000000 - 12000000= $ 12000000

On seeing the Net foreign exchange exposure to be positive $ 12000000 we can draw the inference that the bank holds a long position in the US dollar. The reason for the same is that because long position only occurs when we own a security. And seeing the figures above we can say that the bank has an excess reserve of $12000000 over its liabilities. Having a long position has it's own advantages. Talking about the bank in the case above it can make good investments in the assets with the amount of dollar reserves it holds. Hence having a long position is always beneficial.