X-IM Bank has ¥14 million in assets and ¥23 million in liabilities and has sold ¥8 million in foreign currency trading. What is the net exposure for X-IM? For what type of exchange rate movement does this exposure put the bank at risk?
The net exposure would be ¥14 million – ¥23 million – ¥8 million = -¥17 million. This negative exposure puts the bank at risk of an appreciation of the yen against the dollar. A stronger yen means that repayment of the net position would require more dollars
As the answer mentioned that the risk of an appreciation of the yen against the dollar. Why?