Suppose you own a portfolio of British securities valued at $430,000. The exchange rate is currently at $1 = £0.57. A currency contract on British pounds is set at 62,500 pounds. How many contracts must you purchase to protect your portfolio from exchange rate risk?
A) 1
B) 2
C) 3
D) 4

Question

Quizplus · Accepted Answer

To protect the portfolio, you need to hedge the value of $430,000 in pounds. First, convert the portfolio value to pounds: $430,000 * £0.57 = £245,100. Then, divide the pound value by the contract size: £245,100 / 62,500 = 3.9216. Since you cannot purchase a fraction of a contract, you need to round up to the nearest whole number, which is 4 contracts.

Suppose You Own a Portfolio of British Securities Valued at $430,000