Consider a German portfolio manager who holds a portfolio of U S stocks currently worth $5 million In order to hedge against a potential depreciation of the dollar, the portfolio manager proposes to sell December futures contracts on the dollar that currently trade at 1 02 $ and expire in two month...

a The return on the unhedged ...

Consider a German portfolio manager who holds a portfolio of U.S. stocks currently worth $5 million. In

Question:

Consider a German manager who holds a of U.S. currently worth $5 million. In order to hedge against a potential depreciation of the dollar, the manager proposes to sell December futures contracts on the dollar that currently trade at €1.02/$ and expire in two months. The spot is currently €0.974/$. A month later, the value of the U.S. is $5,150,000, and the spot is €1.1/$, while the futures is €1.15/$.
a. Evaluate the effectiveness of the hedge by comparing the fully hedged return with the unhedged return.
b. Calculate the return on the assuming a 50 percent hedge ratio.
Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...