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Question 4 - 18 marks On December 13, 2019, Singapore's Government Investment Corporation (GIC) announced that it has reached an agreement to acquire an European logistics real estate portfolio for a total consideration of EUR 950 million comprising 28 logistics assets with over 1 million square meters of industrial space across Europe. Based on the prevailing spot exchange rate of EUR 1 = SGD 1.5070, GIC would be investing Singapore Dollar (SGD) 1,432 million for the assets. GIC has targeted to have the value of its investments increased by 15% at the end of 5 years to EUR 1,093 million. Management is considering the economic exposure of such an investment, recognizing that changes in SGD/EUR exchange rate could affect EUR value of these European assets, in addition to their value in SGD due to conversion. To prepare for the final management decision, GIC's CFO asked your consulting firm to consider the economic exposure and hedging strategy for the investment. You analysed past information on 20-year historical data on industrial real estate rents and prices, interest rates and exchange rates in SGD and EUR, industrial productions and GDP in the European Union and how they were sensitive to changes in interest rate and exchange rates. Based on your study, you believed that there could be three possible scenarios (Strong, Base and Weak Cases). You then estimated the likelihood of each scenario, and under each scenario, the expected EUR value of the real estate assets and SGD/EUR exchange rate at the end of five years as follows: Scenarios Probability Value of Assets in EUR million (P*) (in EUR Million) 874 1,093 1,312 Weak Case Base Case Strong Case 32% 36% 32% Exchange rate (S) EUR 1 = SGD 1.3563 1.5070 1.6577 4A. Based on the above information, compute the mean for both Exchange Rate (S) and SGD value of the real estate assets (P). (4 marks) 4B. Compute variance of exchange rate, Var (S). (3 marks) 4C. Compute Covariance between exchange rate and SGD value of the real estate assets, Cov (P, S). (3 marks) 4D. Compute the exposure coefficient (b). (2 marks) 4E. Based on the above strategy, make your recommendation to the CFO on how to hedge the economic exposure using the forward market. Assume that you are using forward contracts with forward rate at EUR 1 = SGD 1.5085. Illustrate how your economic exposure is reduced by your recommended strategy. (6 marks) Question 4 - 18 marks On December 13, 2019, Singapore's Government Investment Corporation (GIC) announced that it has reached an agreement to acquire an European logistics real estate portfolio for a total consideration of EUR 950 million comprising 28 logistics assets with over 1 million square meters of industrial space across Europe. Based on the prevailing spot exchange rate of EUR 1 = SGD 1.5070, GIC would be investing Singapore Dollar (SGD) 1,432 million for the assets. GIC has targeted to have the value of its investments increased by 15% at the end of 5 years to EUR 1,093 million. Management is considering the economic exposure of such an investment, recognizing that changes in SGD/EUR exchange rate could affect EUR value of these European assets, in addition to their value in SGD due to conversion. To prepare for the final management decision, GIC's CFO asked your consulting firm to consider the economic exposure and hedging strategy for the investment. You analysed past information on 20-year historical data on industrial real estate rents and prices, interest rates and exchange rates in SGD and EUR, industrial productions and GDP in the European Union and how they were sensitive to changes in interest rate and exchange rates. Based on your study, you believed that there could be three possible scenarios (Strong, Base and Weak Cases). You then estimated the likelihood of each scenario, and under each scenario, the expected EUR value of the real estate assets and SGD/EUR exchange rate at the end of five years as follows: Scenarios Probability Value of Assets in EUR million (P*) (in EUR Million) 874 1,093 1,312 Weak Case Base Case Strong Case 32% 36% 32% Exchange rate (S) EUR 1 = SGD 1.3563 1.5070 1.6577 4A. Based on the above information, compute the mean for both Exchange Rate (S) and SGD value of the real estate assets (P). (4 marks) 4B. Compute variance of exchange rate, Var (S). (3 marks) 4C. Compute Covariance between exchange rate and SGD value of the real estate assets, Cov (P, S). (3 marks) 4D. Compute the exposure coefficient (b). (2 marks) 4E. Based on the above strategy, make your recommendation to the CFO on how to hedge the economic exposure using the forward market. Assume that you are using forward contracts with forward rate at EUR 1 = SGD 1.5085. Illustrate how your economic exposure is reduced by your recommended strategy. (6 marks)