Question
2. (Ch. 5) Basis Risk. A U.S. investor has invested NZD 3M in the New Zealand asset. We assume the value of this asset will
2. (Ch. 5) Basis Risk. A U.S. investor has invested NZD 3M in the New Zealand asset. We assume the value of this asset will always be NZD (New Zealand dollar) 3M, and there are no extra cash flows in the NZD. On September 12, the investor decided to hedge foreign exchange risk using December NZDUSD futures. The market quotes for spot and forward exchange rates on September 12 were: FSep 12, Dec = 0.69 (NZDUSD). SSep 12 = 0.70 (NZDUSD).
Today, on October 12, the investor wants to examine his position. He observes: FOct 12, Dec = 0.63 (NZDUSD). SOct 12 = 0.66 (NZDUSD).
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What is the USD change in this investor's underlying position (NZD 3M) from September 12 to October 12? (5 points)
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What is the basis of this future contract on September 12? (2 points)
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What is the basis of this future contract on October 12? (2 points)
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What is the USD change in this investor's hedging position using NZDUSD futures from September 12 to October 12? (5 points)
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What is the USD change in this investor's overall position futures from September 12 to October 12? (5 points)
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Is this hedge by future contracts perfect? (1 point) Why? (2 points)
**PLEASE EXPLAIN ALL ANSWERS please don't just give me the answers show work I need to understand**
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