Question

You are a U.S. importer desiring to purchase merchandise from an Italy exporter invoiced in Euros, at a cost of €160,000. You will contact your U.S. bank A (where of course you have an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €0.6250/$1.00. Consider you accept this price. Bank A then instructs its correspondent bank B in Italy to pay the Italy exporter the amount of the purchase. What will happen to the balance sheet of Bank B based on the correspondence relation between bank A and B, and based on the relationship between Bank B and the Italian exporter? (i.e. increase or decrease in asset or liability, by what amount in what currency)

a. Between bank A and B: _______ (Asset or Liability) will ________(increase or decrease) in ________ (€ or $) in the amount of _________ (Just answer with numbers, no comma or symbols).

b. Between Bank B and the Italian exporter: ________ (Asset or Liability) will _________ (increase or decrease) in ______ (€ or $) in the amount of ________(Just answer with numbers, no comma or symbols).

Answer 1

a.Between bank A and B Asset will increase in $ in the amount of 160000/0.625 = 256000

b. Between Bank B and the Italian exporter Asset will decrease) in € in the amount of 160000.

Explanation:-

a. As Bank A will have to pay the amount to Bank B so the Assets of the bank B Increases because bank A owes to Bank B and the amount will be in Dollars because if the bank A has Euro so they could have directly paid to Exporter but they have dollars so they will pay in Dollars only so Bank B have Assets in Dollar.

b. Now due to Bank B paid amount to Exporter the cash balance will be reduced by 160000€ so the assets will be decrease.

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