You are a U.S. investor who holds a portfolio of French stocks. The market value of the

Question:

You are a U.S. investor who holds a of French stocks. The market value of the is ‚¬20 million, with a beta of 1.2 relative to the CAC index. In November, the spot value of the CAC index is 4,000. The is $1.1/‚¬. The yield, euro interest rates, and dollar interest rates are all equal to 4 percent (fiat yield curves).
a. You fear a drop in the French stock market (but not the euro). The size of CAC index contracts is ‚¬10 times the CAC index. There are futures contracts quoted with March delivery. How many contracts should you buy or sell to hedge the French stock market risk?
b. You are optimistic about the French stock market [different scenario from part (a)] but fear a depreciation of the euro. How many euros should you sell forward?
c. You have the following quotes in Chicago on euro options, March. Should you buy or sell calls or puts to insure against currency risk? What is the premium?

You are a U.S. investor who holds a portfolio of

d. Calculate the result of your strategies (unhedged, hedged with March forward, insured with March options), assuming that your French stock portfolio is still worth ‚¬20 million in March. Simulate for different values of the spot ‚¬:$ in March, namely, ‚¬1 = SI, $1.1, $1.2.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...