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 49

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Question 49/145

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 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 and sells the real at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the impact of this transaction on the bank's risk profile?

A. This transaction eliminates credit risk.

B. This transaction eliminates counterparty risk.

C. This transaction eliminates market risk.

D. This transaction eliminates operational risk.

Correct Answer: C

When Alpha Bank completes a foreign exchange matched transaction, it buys Brazilian reals in the market immediately after selling them to the customer, thus matching the position. This process eliminates market risk as the bank is no longer exposed to fluctuations in the exchange rate between the Australian dollar and the Brazilian real.
* Customer Transaction:
* Alpha Bank sells BRL 100 million to the customer and receives AUD 1,010,000.
* Market Transaction:
* Alpha Bank immediately buys BRL 100 million in the market at the rate of 100, paying AUD
1,000,000.
By matching its position, the bank ensures that it is not exposed to changes in the exchange rate, thereby eliminating market risk.
ReferencesSource: How Finance Works

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