This is regarding the question on Tanaka Global, Question 11 on the 2008 AM exam.
[question removed by admin]
The answer to part is 9000 contracts for USD, and 7000 contracts for JPY
My doubts / questions are related to part B:
1. To calculate unhedged return, let’s say for the USD investment first, I would use RDC = (1+RFC)(1+RFX)-1.
RFC is 945/900-1 = 5%. RFX is spot (1 July) to spot (1 Sep), so 110.9/115.9-1 = -4.34%, and hence RDC = (1+5%) (1+-4.34%)-1 = 0.47%. This is the same as the solution provided by CFAI. Is this method correct, or am I just getting the same answer by coincidence?
2. To calculate hedged return, again for the USD investment first, I would use the same RDC formula again, however this time around, the RFX would change because the currency would be assumed as hedged.
o If the hedge were to be lifted in between, then I would compare the futures prices as of 1 Jul (115.7) and on the assumed date of the lifting of the hedge i.e. 1 Sep (110.77), i.e. 115.7/110.77-1= 4.45%, because I have locked in a price to sell of 115.7, whereas today the price to sell has fallen to 110.77, so it is favorable to me, and hence RDC = (1+5%) (1+4.45%)-1 = 9.67%.
o This is NOT the same as the solution provided by CFAI. According to CFAI, the correct answer is a return of 4.72%.
What is the error in my approach above? Can someone kindly clarify please? Grateful for your time.
[question removed by admin]
The answer to part is 9000 contracts for USD, and 7000 contracts for JPY
My doubts / questions are related to part B:
1. To calculate unhedged return, let’s say for the USD investment first, I would use RDC = (1+RFC)(1+RFX)-1.
RFC is 945/900-1 = 5%. RFX is spot (1 July) to spot (1 Sep), so 110.9/115.9-1 = -4.34%, and hence RDC = (1+5%) (1+-4.34%)-1 = 0.47%. This is the same as the solution provided by CFAI. Is this method correct, or am I just getting the same answer by coincidence?
2. To calculate hedged return, again for the USD investment first, I would use the same RDC formula again, however this time around, the RFX would change because the currency would be assumed as hedged.
o If the hedge were to be lifted in between, then I would compare the futures prices as of 1 Jul (115.7) and on the assumed date of the lifting of the hedge i.e. 1 Sep (110.77), i.e. 115.7/110.77-1= 4.45%, because I have locked in a price to sell of 115.7, whereas today the price to sell has fallen to 110.77, so it is favorable to me, and hence RDC = (1+5%) (1+4.45%)-1 = 9.67%.
o This is NOT the same as the solution provided by CFAI. According to CFAI, the correct answer is a return of 4.72%.
What is the error in my approach above? Can someone kindly clarify please? Grateful for your time.