Reference no: EM132725700
You are working as a finance manager in Junebank Sdn Bhd. Junebank is an investment holding company, its principal activity is investing in real estate and financial assets. Its income derives from these investing activities such as dividends, interest, rental, and so on. Currently, the company wishes to expand its business by acquiring capital from the international financial market. The company's CEO asks you to prepare a report to provide your views if he wishes to cross-list Junebank equity shares on more than one national exchange and to source IPO from both domestic and foreign investors.
Also, Junebank does not wish to expose to the exchange rate risk. The CEO is asking you to analyze investment in a US mutual fund. This targeted US mutual fund has invested a total of $14 million in the UK shares. The spot exchange rate is $1.65£. The forward rate for delivery in six months is at $1.645£. Six months later, the UK shares can be sold for £8.5 million and the spot exchange rate is at $1.69£.
You are required to provide the report according to the following questions.
(a) Explain in the report, is the US mutual fund exposed to the risk of the changes of the $/£ rate?
(b) Many investment strategies that can be applied to diversify the investment portfolio. Describes is hedging can be applied to buy or sell the UK pounds forward?
From the investment in the US mutual fund, provide the possible profit or loss in terms of USD based on the spot exchange rate of $1.65£. Then described is the US mutual fund had it originally hedged its initial investment in the UK shares. Compute the USD based annualized rate of return. Explain the result if its USD denominated profit and rate of return, had it not hedged.
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