The paper “ Hedging an Equity Portfolio” is an engrossing example of a finance & accounting assignment. Choose June as a delivery month because it is close to the month containing the expiration of the hedge. The size of the portfolio has been constructed and the date of birth chosen as indicated in question 1(a), above. Therefore, my equity position would be 28× 1000=28000. On the other hand, the value of my position will be determined by multiplying my equity position with the FTSE 100 index which is 6104.19 as follows= 28000*6104.19= 170917320HedgingQuestion (a)The fund manager may face numerous some of the most common risks faced by fund manager include; currency risk, cost transaction risk, liquidity risk, and bottom-line risk.
Currency risk is attributed to the fluctuation of exchange rates between foreign and domestic currencies. Fund managers may face currency risk through exchange rate parity. Assuming a fund manager who has invested a portfolio in an international market, and wants to sell part of the portfolio to make some returns. The value of the returns realized from the sale of a portfolio may be adversely affected by the fluctuation of currency.
For instance, if the fund manager wants to convert the returns realized into local currency, the manager may realize that a significant proportion of the investment returns will be lost due to the lower value of the local currency against foreign currency. Therefore, a fund manager should be aware of how currency risk can be hedged and ensure that the portfolio returns are not adversely affected by the lower currency value. The fund manager may put the portfolio returns in derivatives such as futures, options, and swaps (Agarwal, Fos, & Jiang, pp. 1271-1280). Transaction cost risk is also a major challenge facing fund managers.
The risk tends to reduce the number of returns realized because fund managers must eliminate all the costs by four countings that they have realized returns from their investment. Some of the transaction cost include; brokerage fee, commission, government taxes, and clearance fee. Transaction cost risk can be hedged through measures such as American and London Depository Receipts (Spiegel, & Zhang, pp. 506-516).
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