An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i_€ = 5%.The bond costs €1,000 today and will return €1,050 at the end of one year without risk.The current exchange rate is €1.00 = $1.50.U.S.dollar-denominated government bonds currently have a yield to maturity of 4 percent.Suppose that the European Central Bank is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities:
S₁ ($/€)= €1.80 per €
S₁ ($/€)= €1.40 per €
Following revaluation,the exchange rate is expected to remain steady for at least another year.
Using the notion of hedging,make a recommendation vis-à-vis how to undertake the project today without "buying" the option.

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The Answer of An American Hedge Fund is considering a one-year investment in an Italian government bond with a one-year maturity and a euro-denominated rate of return of i_€ = 5%.The bond costs €1,000 today and will return €1,050 at the end of one year without risk.The current exchange rate is €1.00 = $1.50.U.S.dollar-denominated government bonds currently have a yield to maturity of 4 percent.Suppose that the European Central Bank is considering either tightening or loosening its monetary policy.It is widely believed that in one year there are only two possibilities: S₁ ($/€)= €1.80 per € S₁ ($/€)= €1.40 per € Following revaluation,the exchange rate is expected to remain steady for at least another year. Using the notion of hedging,make a recommendation vis-à-vis how to undertake the project today without "buying" the option.

An American Hedge Fund Is Considering a One-Year Investment in an Italian