PalacioHill

4. You are French and own a portfolio of U.S. stocks worth $1 million. The current spot and one-month forward exchange rates are 1 euro per $. Interest rates are equal in both countries. You are worried that the results of U.S. elections could lead to a strong depreciation of the dollar and you decide to sell forward $1 million to hedge currency risk. A week later, your U.S. stock portfolio has gone up to $1.02 million, and the spot and forward exchange rates are now 0.95 euro per $.

a) If the portfolio had not been hedged, what is the return in euros?
b) If the portfolio had been hedged as described, what is the return in euros?