Suppose that a U.S. FI has the following assets and liabilities:

Assets

$10 million cash (in dollars)

$100 million U.S. loans (one year) (in dollars) (12%)

$100 million equivalent UK loans (one year) (loans made in pounds) (10%)

Liabilities

$200 million U.S. CDs (one year) (in dollars) (5%)

$10 million borrowed funds (in dollars) (6%)

The current spot exchange rate is $1.5/

Required:

a. What is the FI's net exposure in pounds?

b. Is this bank exposed to U.K. pound appreciation or depreciation?

c.If this FI hedges this foreign exchange risk using forward contract, what forward transaction does it need to engage (e.g., sell or buy pounds, forward period, and forward amount)?