Suppose you own a portfolio of British securities valued at about $500,000. The exchange rate is currently at $1 = £0.66. A currency contract on British pounds is set at 62,500 pounds. How many contracts must you purchase to protect at least 90% of your portfolio from exchange rate risk?
A) 6
B) 5
C) 4
D) 3

Question

Quizplus · Accepted Answer

To protect at least 90% of a $500,000 portfolio, you need to cover $450,000 (90% of $500,000). At an exchange rate of $1 = £0.66, $450,000 is equivalent to £297,000 (£450,000 / $1 = £297,000 / £0.66). Each contract covers 62,500 pounds, so you would need £297,000 / 62,500 contracts = 4.752 contracts. Since you can't purchase a fraction of a contract, you would need to round up to the nearest whole number, which is 5 contracts.

Suppose You Own a Portfolio of British Securities Valued at About