A British investor owns a portfolio of U.S. stocks worth US $20 million. The current spot rate and one-month forward exchange rates are 0.66/$. Interest rates are equal in both countries. The investor sells forward $15 million to hedge currency risk because he is concerned about the outcome of the US elections. A week later, the US stock portfolio has gone up to $21,200,000, and the spot and forward exchange rates are now 0.56/$. a. Find out R* or return in home or domestic currency.

(21.2m*.56) -(20m*0.66)/(20m*0.66)=-10.06

profit=(21.2m*.56) -(20m*0.66)-20m*(.56-.66)=672,000

the us stock went up by6% but the dollar lost by 15%

672,000/20*100=3.35%

R*= 3.36-6=-2.64

b. Find out the hedged returns, RH.

Rh= -2.64-6

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