Question

If you expect the euro to depreciate in the near future, would an Australian based FI in Paris prefer to be net long or net short in its asset positions? Discuss.

Answer 1

Australian based FI would prefer to be net short in its asset positions. It means, the liabilities will be greater than assets. So that, when the euro depreciates with respect to the dollars the Australian FI would have to pay back the net liability positions will lesser dollars. It also means that, the reduction in the value of foreign liabilities (in dollar values) will be more than the reduction in the foreign assets in dollar values after the conversion.