2016-FRR Exam Dumps | A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian

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Financial Risk and Regulation (FRR) Series
GARP.2016-FRR.v2024-09-09.q145
Question 118

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Question 118/145

A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold Brazilian reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer, sells the reals, and receives AUD 1,010,000. To perform foreign exchange matched position trading, the banks should

A. Immediately buy the real at the market rate of 100 and pay AUD 1,000,000.

B. Immediately buy the real above the market rate of 105 and pay AUD 1,050,050.

C. Immediately sell the real at the market rate of 100 and receive AUD 1,000,000.

D. Immediately sell the real above the market rate of 105 and receive AUD 1,050,050.

Correct Answer: A

To perform foreign exchange matched position trading, Alpha Bank should match the customer's transaction to eliminate currency risk. Here's the breakdown:
* Customer transaction: The customer buys AUD 1,010,000 at a rate of 101 for BRL 100 million.
* Market transaction: To cover this, Alpha Bank should buy BRL at the market rate of 100, paying AUD
1,000,000 (BRL 100 million / 100 = AUD 1,000,000).
This ensures that the bank is not exposed to fluctuations in the BRL/AUD exchange rate.
ReferencesSource: How Finance Works

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