i
ninated rate but te that rcent of
t to the
change
amount
in Hong
a sub
urrency, e loans ume for
alue of ey, and
Lets was
ins were
ral.) In we take ateral if e of the
sent and
Assump lars are
s to that h of this
Set price egative, han 1.
he same
had for
percent
erms of
Assets
Figure 4
How an Exchange Rate Depreciation Can Help a Financial Firm
(Balance Sheet Items Measured in Units of Foreign Currenc,
After Asset Value Decline and 30% Depreciation
Loans backed by HK assets denominated in HK$
Foreign assets denominated in foreign currency
Total
Liabilities
Deposits
denominated.nHKS
Other abilities denominated in foreign currency
Tola!
Net Worth
Assets less Liabilities
After 50% Decine in
Initially
HK Asset Values
X
1/2 4:3px
1 2114 3x
X
y
·2 3.x
2./3)x +
3. 01x
101
19 10.-/
Y
2 319 10%
9 10%
9 0 2 36 - ¿
11/10
·1.10iy
.-7.30 ·
12 3-,j=
10
in the
kes 1
unit of Kong J worth
J.
there e sheet. et worth
t not as When a e. there-
course.
precia-
tion reduces the value of their deposits. At the same time. the value of assets in terms of foreign currency is the same whether or not a depreciation occurs. This is true in general. The extent of a depreciation of the Hong Kong dollar determines how the value of total assets is divided among categories of liabilities: the greater the deprecia- tion of the Hong Kong dollar, the smaller the share that goes to deposits denominated in Hong Kong dollars.
Over the last two years, many Hong Kong financial
institutions seem to have been in positions like the one depicted here. If they were. then the Exchange Fund could easily have viewed a depreciation of the Hong Kong dollar as a way to avoid the major disruption to the economy that numerous financial firm bankruptcies would cause. A depreciation could smooth the Hong Kong economy's adjustment to lower real property values in terms of foreign currency. The adjustment would be smoother not because financial firms' capital losses
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