andytrader

A U.S. investor who holds a £2,000,000 investment wishes to hedge the portfolio against currency risk. The investor should:

A) sell £2,000,000 worth of futures for U.S. dollars.

B) buy £2,000,000 worth of futures for U.S. dollars.

C) sell $2,000,000 worth of futures for British pounds.

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The investor should sell £2,000,000 worth of futures contracts for U.S. dollars. This will offset the existing long position in pound-denominated assets. In so doing, the investor has effectively fixed the exchange rate for pounds into dollars for the duration of the futures contract.

mouse123

A U.S.-based investor has purchased a 15,000,000 peso office building in Mexico. He has hedged his investment by selling forward futures at $0.1098/peso. Two months later, the futures exchange rate has fallen to $0.0921/peso. The investor’s net change in the futures position is:

A) $1,647,000.

B) -$265,500.

C) $265,500.

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The realized gain on the futures position is:
V0 (-Ft + F0) = 15,000,000 pesos × (-$0.0921/peso + $0.1098/peso) = $265,500.

mouse123

Which of the following equations represents the net profit/loss on a hedged position, in domestic currency terms?

A) V0 (-Ft + F0).

B) (Vt* - V0*) / V0*.

C) ( Vt St - V0 S0) – V0 (Ft - F0).

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Recall the following variables used in hedge analysis:

V0 – The value of the portfolio of foreign assets at time 0, stated in the foreign currency.

Vt – The value of the portfolio of foreign assets at time t, stated in the foreign currency.

Vt* - The value of the portfolio of foreign assets at time t, stated in the domestic currency.

St – The spot rate, quoted at time t.

Ft – The futures exchange rate, quoted at time t.

(Vt* - V0*) / V0* is the portfolio rate of return, stated in domestic currency terms. Vt St - V0 S0 is the gain or loss on a portfolio, stated in domestic currency terms. V0 (-Ft + F0) is the gain or loss on a futures position, stated in domestic currency terms. Therefore, the net profit/loss, in domestic currency, is equal to (Vt St - V0 S0) – V0 (Ft - F0).

mouse123

The manager of a large, multi-currency portfolio is investigating methods to hedge the portfolio. If she regresses the return of the portfolio on several major currencies, she is most likely trying to solve the problem of:

A) illiquid forward and futures markets for some currencies.

B) the symmetry of the payoff of forward and futures contracts.

C) the asymmetry of the payoff of forward and futures contracts.

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The manager’s regression would most likely be part of setting up a cross-hedge, which is to remedy the problem that some of the currencies represented in the portfolio will probably have illiquid forward and futures markets.