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The Glover Scholastic Aid Foundation has received a €20 million global government bond portfolio from a Greek donor. This bond portfolio will be held in euros and managed separately from Glover's existing U.S. dollar-denominated assets. Although the bond portfolio is currently unhedged, the portfolio manager, Raine Sofia, is investigating various alternatives to hedge the currency risk of the portfolio. The bond portfolio's current allocation and the relevant country performance data are given in Exhibits 1 and 2. Historical correlations for the currencies being considered by Sofia are given in Exhibit 3. Sofia expects that future returns and correlations will be approximately equal to those given in Exhibits 2 and 3. Exhibit 1. Glover Scholastic Aid Foundation Current Allocation Global Government Bond Portfolio Maturity (years) Country Greece Allocation (%) 30 5 A 35 5 B 10 10 C 10 5 D 15 10 Exhibit 2. Country Performance Data (in local currency) 5-year Excess Country Greece Cash Return Bond Return (%) 10-year Excess Bond Return (%) Currency Return Unhedged Liquidity of 90-day Currency Forward (%) Contracts 2.0 1.5 2.0 Good A 1.0 2.0 3.0 -4.0 Good B 4.0 0.5 1.0 2.0 Fair C 3.0 1.0 2.0 -2.0 Fair D 2.6 1.4 2.4 -3.0 Good Required: Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Expected total annual return %

The Glover Scholastic Aid Foundation has received a €20 million global government bond portfolio from a Greek donor. This bond portfolio will be held in euros and managed separately from Glover's existing U.S. dollar-denominated assets. Although the bond portfolio is currently unhedged, the portfolio manager, Raine Sofia, is investigating various alternatives to hedge the currency risk of the portfolio. The bond portfolio's current allocation and the relevant country performance data are given in Exhibits 1 and 2. Historical correlations for the currencies being considered by Sofia are given in Exhibit 3. Sofia expects that future returns and correlations will be approximately equal to those given in Exhibits 2 and 3. Exhibit 1. Glover Scholastic Aid Foundation Current Allocation Global Government Bond Portfolio Maturity (years) Country Greece Allocation (%) 30 5 A 35 5 B 10 10 C 10 5 D 15 10 Exhibit 2. Country Performance Data (in local currency) 5-year Excess Country Greece Cash Return Bond Return (%) 10-year Excess Bond Return (%) Currency Return Unhedged Liquidity of 90-day Currency Forward (%) Contracts 2.0 1.5 2.0 Good A 1.0 2.0 3.0 -4.0 Good B 4.0 0.5 1.0 2.0 Fair C 3.0 1.0 2.0 -2.0 Fair D 2.6 1.4 2.4 -3.0 Good Required: Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Expected total annual return %

International Financial Management
International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter20: Short-term Financing
Section: Chapter Questions
Problem 5ST
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The Glover Scholastic Aid Foundation has received a €20 million global government bond portfolio from a Greek donor. This bond portfolio will be held in euros and managed separately from Glover's existing U.S. dollar-denominated assets. Although the bond portfolio is currently unhedged, the portfolio manager, Raine Sofia, is investigating various alternatives to hedge the currency risk of the portfolio. The bond portfolio's current allocation and the relevant country performance data are given in Exhibits 1 and 2. Historical correlations for the currencies being considered by Sofia are given in Exhibit 3. Sofia expects that future returns and correlations will be approximately equal to those given in Exhibits 2 and 3. Exhibit 1. Glover Scholastic Aid Foundation Current Allocation Global Government Bond Portfolio Country Greece Allocation (%) Maturity (years) 5 A B C D 30 35 5 10 10 10 5 15 10 Exhibit 2. Country Performance Data (in local currency) Country Cash Return Greece 2.0 5-year Excess 10-year Excess Bond Return (%) Bond Return (%) 1.5 Unhedged Currency Return (%) Liquidity of 90-day Currency Forward Contracts 2.0 Good A 1.0 2.0 3.0 -4.0 Good B 4.0 0.5 1.0 2.0 Fair с 3.0 1.0 2.0 -2.0 Fair D 2.6 1.4 2.4 -3.0 Good Required: Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Expected total annual return %
Transcribed Image Text:The Glover Scholastic Aid Foundation has received a €20 million global government bond portfolio from a Greek donor. This bond portfolio will be held in euros and managed separately from Glover's existing U.S. dollar-denominated assets. Although the bond portfolio is currently unhedged, the portfolio manager, Raine Sofia, is investigating various alternatives to hedge the currency risk of the portfolio. The bond portfolio's current allocation and the relevant country performance data are given in Exhibits 1 and 2. Historical correlations for the currencies being considered by Sofia are given in Exhibit 3. Sofia expects that future returns and correlations will be approximately equal to those given in Exhibits 2 and 3. Exhibit 1. Glover Scholastic Aid Foundation Current Allocation Global Government Bond Portfolio Country Greece Allocation (%) Maturity (years) 5 A B C D 30 35 5 10 10 10 5 15 10 Exhibit 2. Country Performance Data (in local currency) Country Cash Return Greece 2.0 5-year Excess 10-year Excess Bond Return (%) Bond Return (%) 1.5 Unhedged Currency Return (%) Liquidity of 90-day Currency Forward Contracts 2.0 Good A 1.0 2.0 3.0 -4.0 Good B 4.0 0.5 1.0 2.0 Fair с 3.0 1.0 2.0 -2.0 Fair D 2.6 1.4 2.4 -3.0 Good Required: Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Expected total annual return %
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