Question
The expected returns from the investments are 10% and 15%; the standard deviations of the returns are 16% and 24%, and the correlation between returns
The expected returns from the investments are 10% and 15%; the standard deviations of the returns are 16% and 24%, and the correlation between returns is 0.8. What are the expected return and standard deviation of the portfolio if the portfolio weights are given by w1= - 0.5 and w2=1.5? (2 marks) b. Suppose a US company is expected to pay 100 million Australian Dollars (AUD) in 6 months and wants to hedge its exposure to exchange rate risk. The following instruments are available a 6-month forward contract to buy/sell US dollars (USD) at the exchange rate USD/AUD = K, and a put option to sell USD at the exchange rate USD/AUD = K. Assume the price of the put option is p AUD to sell one USD at the strike K, and the risk-free rate is zero. i. If the company uses a forward contract, decide whether to go long or short, then then draw the payoff diagram, with the USD/AUD exchange rate on the x-axis and the net amount the company pays in 6 months (in USD) on the y-axis. (2 marks) ii. If the company uses a put option, decide whether to go long or short, then then draw the payoff diagram, with the USD/AUD exchange rate on the x-axis and the net amount the company pays in 6 months (in USD) on the y-axis. (2 marks)
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