Question 4a) It is currently 30th April 2024, and a German fund manager holds a portfolio of Brazilian bonds currentlyworth 10 million Brazilian real (BRL) and is worried about a potential depreciation of the BRL over thefollowing 3 months. Data on spot and future exchange rates and the value of the underlying portfolioboth at 30th April 2024 and three months later at 31st July is given in Table 3 below.Table 3Data on spot and future exchange rates andthe value of the underlying portfolioRequired30 April 202431 July 2024Value ofportfolio (BRL)10.0 million11.2 millionSpotEUR:BRLFutures (August 20244.60604.7872contract) EUR:BRL4.77504.9946(i) Explain how the fund manager could offset the risk of a BRL depreciation with an appropriatehedging strategy.(ii) Evaluate the effectiveness of any hedging strategy that you suggest by comparing the fullyhedged portfolio return with that of the unhedged portfolio. |(iii) Calculate the return on the portfolio assuming a 75% hedge ratio.(iv) Discuss how the German investor would determine the hedge ratio necessary to minimise theimpact of currency fluctuations on his investment returns.

Certainly! Let's break down the process of hedging currency risk in more detail:Identifying Currency…

Answered: Question 4 a) It is currently 30th…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 19QA

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Illustrate how the currency risk exposure can be hedged for Fund Y. Determine the payoff for the forward position if the exchange rate rises to MYR/RMB 1.6830 after 3 months.
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You use today's spot rate of the Brazilian real to forecast the spot rate of the real for one month ahead. Today's spot rate is $0.4577. Assume that you obtain the end-of-month spot exchange rates of the Brazilian real during the end of each of the last 6 months. End of Month 1 2 3 4 5 6 % $ Value of Brazilian real Use the value-at-risk method to determine the maximum percentage loss of the Brazilian real over the next month based on a 95 percent confidence level. Do not round intermediate calculations. Round your answer to two decimal places. $0.4244 0.4290 0.4283 0.4617 0.4725 0.4577 Forecast the exchange rate that would exist under these conditions. Do not round intermediate calculations. Round your answer to four decimal places.
Cray Research sold a supercomputer to the Max Planck Institute in Germany on credit and invoiced €11.00 million payable in six months. Currently, the six-month forward exchange rate is $1.15 per euro and the foreign exchange adviser for Cray Research predicts that the spot rate is likely to be $1.10 per euro in six months. Required: a. What is the expected gain/loss from a forward hedge? Note: A Negative value should be indicated with a minus sign. Do not round intermediate calculations. Round your final answer in whole dollars not in millions. b. If you were the financial manager of Cray Research, would you recommend hedging this euro receivable? c. Suppose the foreign exchange adviser predicts that the future spot rate will be the same as the forward exchange rate quoted today. Would you recommend hedging in this case? d. Suppose now that the future spot exchange rate is forecast to be $1.22 per euro. Would you recommend hedging? a. b. Would you recommend hedging this euro…
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Suppose that you have revenues denominated in Japanese Yen expected in 6 months. How would you hedge this risk using money market instruments? How would a money market hedge compare to a forward hedge?

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