The Glover Scholastic Aid Foundation has received a 20 million global government bond portfolio from a Greek donor. This bond portfolio will be held in
The Glover Scholastic Aid Foundation has received a 20 million global government bond portfolio from a Greek donor. This bond portfolio will be held in euros and managed separately from Glovers existing U.S. dollar-denominated assets. Although the bond portfolio is currently unhedged, the portfolio manager, Raine Sofia, is investigating various alternatives to hedge the currency risk of the portfolio. The bond portfolios current allocation and the relevant country performance data are given in Exhibits 1 and 2. Historical correlations for the currencies being considered by Sofia are given in Exhibit 3. Sofia expects that future returns and correlations will be approximately equal to those given in Exhibits 2 and 3.
Exhibit 1. Glover Scholastic Aid Foundation Current Allocation Global Government Bond Portfolio
Country | Allocation (%) | Maturity (years) |
Greece | 25 | 5 |
A | 45 | 5 |
B | 10 | 10 |
C | 10 | 5 |
D | 10 | 10 |
Exhibit 2. Country Performance Data (in local currency)
Country | Cash Return | 5-year Excess Bond Return (%) | 10-year Excess Bond Return (%) | Unhedged Currency Return (%) | Liquidity of 90-day Currency Forward Contracts | ||
Greece | 2.0 | 1.5 | 2.0 | Good | |||
A | 1.0 | 2.0 | 3.0 | 4.0 | Good | ||
B | 4.0 | 0.5 | 1.0 | 2.0 | Fair | ||
C | 3.0 | 1.0 | 2.0 | 2.0 | Fair | ||
D | 2.6 | 1.4 | 2.4 | 3.0 | Good | ||
Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
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