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You work for a hedge fund that has made the following investments (at today's spot price):

You work for a hedge fund that has made the following investments (at today's spot price):


(I) $100,000,000 (USD) in a private startup company in Australia

(II) $100,000,000 (USD) in a European company that is publicly traded


(a) If USD/AUD goes up by 10% over the next year and USD/EUR goes down by 20%, what is the overall return earned by the hedge fund if each investment goes up by 15%.



(b) Show exactly what you could do to hedge the investments in part (a) so that the hedge fund would earn an overall return of 15% regardless what happens to USD/AUD and USD/EUR over the next year. (Prove that the hedge works by showing examples!)

Top Answer

a) Since 1 USD is AUD 1.32 at the time of investment and 1... View the full answer

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