Ive been working on question 11 of the 2008 cfa past am paper and cannot figure out how they did this or do it in a timely manner. I’m debating just working on other things and giving this up but maybe I can get some help here.
the question is part b:
Makoto Satou manages the Tanaka Global Fund, a Japan-based investment fund, which has USD 900 million invested in the U.S. and EUR 700 million invested in Europe. Tanaka Global Fund’s home currency is the Japanese yen (JPY). On 1 July 2008, Satou decides to fully hedge the fund’s currency risk for the next two months. Data are presented in Exhibit 1.
Exhibit 1 Foreign Exchange Rates 1 July 2008
A. State the futures positions the Tanaka Global Fund should take on 1 July 2008, to hedge the fund’s currency risk. Calculate the number of contracts needed to hedge. Show your calculations.
(3 minutes)
On 1 September 2008, Tanaka Global Fund’s U.S. portfolio has increased to USD 945 million; its European portfolio has increased to EUR 735 million. Current foreign exchange data are presented in Exhibit 2.
Exhibit 2 Foreign Exchange Rates 1 September 2008
B. Evaluate the effectiveness of the Tanaka Global Fund’s hedge by comparing the fully hedged portfolio return with the unhedged portfolio return. Show your calculations.
(6 minutes)
Spot rate (JPY/USD)
115.90
Spot rate (JPY/EUR)
155.75
September dollar futures contract (size = USD 100,000) (JPY/USD)
115.70
September euro futures contract (size = EUR 100,000) (JPY/EUR)
156.70
Spot rate (JPY/USD)
110.90
Spot rate (JPY/EUR)
144.75
September dollar futures contract (size = USD 100,000) (JPY/USD)
110.77
September euro futures contract (size = EUR 100,000) (JPY/EUR)
144.80
*I stuggle understanding when calcualting forward discount/premium for profit of loss when if I use foreign currency as price or base in the quotation. I never know when to flip it.