Problem 1

Data Obtained and Information Given

es = 15714.18
ef = 15578
ee = 15557.82
ia = 0.05
a.0 = 100

Foreign equity portfolio is worth of

a1.0 = a.0 * es
a1.0
## [1] 1571418

Foreign equity portfolio is expected to be worth of

a1.1 = a1.0 * (1 + ia)
a1.1
## [1] 1649989

If hedges, total expected portfolio value in domestic currency

a.1 = a1.1/ef
a.1
## [1] 105.9179

The domestic currency expected return is therefore

expected.return = a.1/a.0 - 1
expected.return
## [1] 0.05917891

Not hedging would be

not.hedged = a1.1/ee
not.hedged
## [1] 106.0553

The domestic non-hedged expected return is therefore

er.nonhedged = not.hedged/a.0 - 1
er.nonhedged
## [1] 0.06055276

How “better of” is not hedging

better = er.nonhedged - expected.return
better
## [1] 0.001373858