Discuss two forms of trading costs associated with this currency management strategy. Gupta tells the fund manager
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Discuss two forms of trading costs associated with this currency management strategy.
Gupta tells the fund manager of Portfolio B:
“We need to seriously consider the potential costs associated with favorable currency rate movements, given that a 100% hedge-ratio strategy is being applied to this portfolio.”
Kamala Gupta, a currency management consultant, is hired to evaluate the performance of two portfolios. Portfolio A and Portfolio B are managed in the United States and performance is measured in terms of the US dollar (USD). Portfolio A consists of British pound (GBP) denominated bonds and Portfolio B holds euro (EUR) denominated bonds.
Gupta calculates a 19.5% domestic-currency return for Portfolio A and 0% domesticcurrency return for Portfolio B.
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Two forms of trading costs associated with the currency management strategy of maintaining a 100 hedgeratio for Portfolio B are 1 Transaction Costs De...View the full answer
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