2. A U.S. insurance company borrows 1,000,000 to invest in a private placement of US bonds. Each bond pays $300 in interest per year for 20 years.

If the current exchange rate is 0.874/$, what is the nature of the US insurance companys

exchange rate risk (net long or net short)?

Specifically, what type of exchange rate movement concerns this insurance company (are they

exposed to an appreciation or depreciation of the pound)?

3. Answer the following questions regarding the balance sheet given below. Assume 1 = $1.30.

a) Is this bank net short or net long?

b) What is the net interest income (NII) if the value of the appreciates to $1.50?

c) What is the net interest margin (NIM) if the value of the depreciates to $1.10?

Assets	Liabilities and Equity
$800M in USD	$300M in USD
$200M in GBP	$700M in GBP

Country	Deposit Rate	Lending Rate
US	8%	9%
UK	4%	5%

4. Assume that a US bank has assets located in London worth 150 million on which it earns an

average of 8% per year. The bank has 100 million in liabilities on which it pays an average of 6% per year. The current spot rate is 1 = $1.50

a) If the exchange rate at the end of the year is 1 = $1.25, will the US dollar have appreciated

or depreciated against the pound?

b) Is the bank net short or net long? Given the change in the exchange rate, will the bank

make money or lose money?