Question

An investment manager hedges a portfolio of Bunds (German government bonds) with a six-month forward contract. The current spot rate is €1.75/$ and the 180-day forward rate is €1.78/$. At the end of the six-month period, the Bunds have risen in value by 3.85% (in € terms), and the spot rate is now €1.76/$. The Bunds earn interest at the annual rate of 2 percent paid semiannually. What is the investment manager’s total dollar return on the hedged Bunds? What is the total dollar return on the Bunds without hedging? A 1.19%; 2.34% B 4.07%; 5.25% C 3.08%; 4.26% D 4.26%; 3.08%

Answer 1