as the risk manager for a large pension fund, you know the investment staff is c

Question

as the risk manager for a large pension fund, you know the investment staff is considering a move to diversify the portfolio over the next six months by investing $900 million in japanese government bonds. Although you like the investment profile of these securities you are concerned that adverse foreign exchange rate fluctuations could reduce or even eliminate the expected returns from owning the bonds. consequently you want to consider a hedge againnst this exposure using currency futures contracts.

a. describe how a currency futures contract position could be employed along with the purchase of the bond in this situation to mitigatee the risk exposuree the risk mmanager is concerned with

b. explain what would happen to both ethee currency futures position and the underlying bond holding if the USD/JPY exchange rate moved up unexpectedly after you initiated the fx hedge transaction

Explanation / Answer

a)

Currency futures are exchange traded contracts to buy orsell a specific currency at a future date for at apre-set price determined by the market. Unlikeforex “spot” transactions which are short termcontracts conducted through the inter-banksystem, currency futures are longer term contractsexecuted primarily on the Chicago Mercantile Exchange (CME).

Forex trading that occurs in live time, is referred to as the“Spot” market. Forex transactions on the spotmarket are usually settled within two days. The foreignexchange market, more commonly referred to as the “FX”or “Forex” market, is an inter-bank system in whichinvestors and corporations can trade currencies

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.