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Unformatted text preview: How do you hedge the currency risk in this scenario? How much is the return of your investment portfolio at the end of 2008? Answer: To hedge exchange risk ( Here, the exchange rate risk is that Canadian dollar had a chance to weaken against US dollar at the end of 2008. You will end up with fewer US dollars as Canadian dollar depreciates at the time you want to convert investment in Canadian dollars back into US dollars by the end of 2008 ), he or she would also have sold short shares of FXC. Therefore, to hedge the $10,000 position in the EWC units, the investor would short sell 100 FXC shares ($10,000/$100 (the price of FXC at the end of June 2008)), with a view to buying them back at a cheaper price later if the FXC shares fell. The investor who had a hedge in place would have offset part of the $2,500 loss in EWC through a gain in the short FXC position, which is $2,000 (-100*(80-100)). The total return of the portfolio is -$500....
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This note was uploaded on 07/18/2011 for the course IBUS 311 taught by Professor Chen during the Spring '08 term at Binghamton University.
- Spring '08