Recommend an alternative hedging strategy that will keep the hedge ratio close to the target hedge ratio.
Question:
Recommend an alternative hedging strategy that will keep the hedge ratio close to the target hedge ratio. Identify the main disadvantage of implementing such a strategy.
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.
The fund manager of Portfolio B believes that setting up a full currency hedge requires a simple matching of the current market value of the foreign-currency exposure in the portfolio with an equal and offsetting position in a forward contract.
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One alternative hedging strategy that Kamala Gupta could recommend is the use of a ...View the full answer
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