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 Allocation (%) Maturity (years) Greece 20 5 A 45 5 B 10 10 C 10 5 D 15 10 Exhibit 2. Country Performance Data (in local currency) Country Cash Return 5-year Excess Bond Return (%) 10-year Excess Bond Return (%) Unhedged Currency Return (%) Liquidity of 90-day Currency Forward Contracts Greece 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 Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

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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	Allocation (%)	Maturity (years)
Greece	20	5
A	45	5
B	10	10
C	10	5
D	15	10

Exhibit 2. Country Performance Data (in local currency)

Country	Cash Return	5-year Excess Bond Return (%)	10-year Excess Bond Return (%)	Unhedged Currency Return (%)	Liquidity of 90-day Currency Forward Contracts
Greece	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

Calculate the expected total annual return (euro-based) of the current bond portfolio if Sofia decides to leave the currency risk unhedged. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

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