Problem
A U.S. insurance company borrows £1,000,000 to invest in a private placement of US bonds. Each bond pays $300 in interest per year for 20 years.
a) If the current exchange rate is £0.874/$, what is the nature of the US insurance company's exchange rate risk (net long or net short)?
b) What type of exchange rate movement in the $ (appreciate or depreciate) will cause the insurance company to lose money?