An Italian investor owns a portfolio of South Korean stocks worth 1.25 billion won. The current spot and one-month forward exchange rates are 1,250 won/ (1 won = 0.0008 euro). Interest rates are equal in both countries. You are worried that some rumor about the bankruptcy of a major local bank could lead to a strong depreciation of the won. You have observed that Korean stocks tend to react negatively to a depreciation of the local currency (won). A broker tells you that a regression of Korean stock returns (measured in won) on the /won percentage exchange rate movements has a slope of 0.50. In other words, Korean stocks tend to go down by 0.5% when the won depreciates by 1%. What should your currency hedge ratio be?

A) To hedge only translation risk would require a hedge ratio of one (100%), and to hedge economic risk would require an additional hedge ratio of +50%. Therefore, the total hedge ratio should be 1.5 or 150%.

B) To hedge only translation risk would require a hedge ratio of + 50%, and to hedge economic risk would require an additional hedge ratio of +100%. Therefore, the total hedge ratio should be 1.5 or 150%.

C) To hedge only translation risk would require a hedge ratio of one (100%), and to hedge economic risk would require an additional hedge ratio of +100%. Therefore, the total hedge ratio should be 2.0 or 200%.

D) To hedge only translation risk would require a hedge ratio of +50%, and to hedge economic risk would require an additional hedge ratio of +50%. Therefore, the total hedge ratio should be 1.0 or 100%