Suppose an Italian bank has short-term borrowings of 400 million euro and 100 million U.S. dollars and

Question:

Suppose an Italian bank has short-term borrowings of 400 million euro and 100 million U.S. dollars and made long term loans of 300 million euro and 250 million U.S. dollars. The euro-dollar exchange rate is initially $1.50 per euro.

a. Ignoring other assets and liabilities, place each item on the appropriate side of the bank’s balance sheet.

b. List the risks that this bank faces.

c. If the euro-dollar exchange rate moved to $1.60 per euro, would the bank gain or lose? Provide calculations to support your answer.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...