Can any one help me understand this question?
After extensive research, Castillo decides to invest in Russian corporate bonds for TF’s portfolio. However, he has not reached a formal decision on whether to hedge the associated foreign currency exposure. He has collected relevant data for the analysis (Exhibit 1). He expects RUB to appreciate by 0.5% against the US$.
Exhibit 1
U.S. and Russian Exchange Rate and Interest Rates Data
Current spot rate
US$ 30 per RUB
1-year U.S. risk-free rate
3.5%
1-year Russian risk-free rate
2.2%
Yield on 10-year Russian government bonds
7.8%
Actual spot rate (in 1 year)
US$ 31.4 per RUB
After extensive research, Castillo decides to invest in Russian corporate bonds for TF’s portfolio. However, he has not reached a formal decision on whether to hedge the associated foreign currency exposure. He has collected relevant data for the analysis (Exhibit 1). He expects RUB to appreciate by 0.5% against the US$.
Exhibit 1
U.S. and Russian Exchange Rate and Interest Rates Data
Current spot rate
US$ 30 per RUB
1-year U.S. risk-free rate
3.5%
1-year Russian risk-free rate
2.2%
Yield on 10-year Russian government bonds
7.8%
Actual spot rate (in 1 year)
US$ 31.4 per RUB
- BasedonCastillo’sexpectations,should he hedge the currency risk associated with Russian corporate bonds?
A. Yes, because the return from hedging is 0.8% greater.
B. Yes,because there turn from hedging is1.3% greater.
C. No,because there turn from remaining unhedged is 0.8% greater.