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Hsving some difficulty working on this 3 part question. If you could please help I would greatly appreciate it and will be sure to leave a review. Thank you in advance!
You are German and own a portfolio of U.S. stocks worth $ 1 million . The currentspot and 1 – month forward rates are $1 . 1000 / E. Interest rates are equal in bothcountries .You are worried that the results of the coming U .S. elections in 3 days could lead to astrong depreciation of the dollar .Question 1 : To hedge FX risk for the principal , you face two choices ( 1 ) buy / longchoice ?forward $ 1 million , or ( 2 ) sell / short forward $ 1 million . Which is the correctThree days later , your U.S. stock portfolio has gone up to $1 . 02 million . The spotand forward rates are now $1 . 1526 / E .Question 2 : If the portfolio had not been hedged , what is the percentage return( rate of return ) in euros over the past 3 days ?Question 3 : If the portfolio is hedged , what is the profit on the hedge portfolio ineuros ? What is the percentage return on the hedge portfolio in euros ?
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