What is the result of the hedge

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Reference no: EM132064030

On April 1, an Australian investor decides to hedge a U.S. portfolio worth $10 million against exchange risk using AUD call options. The spot exchange rate is AUD/$ ? 2.5 or $/AUD ? 0.40. The Australian investor can buy November calls AUD with a strike price of 0.40 U.S. cents per AUD at a premium of 0.8 U.S. cent per AUD. The size of one contract is AUD 125,000. The delta of the option is estimated at 0.5.

a. How many AUD calls should our investor buy to hedge the U.S. portfolio against the AUD/$ currency risk?

b. A few days later the U.S. dollar has dropped to AUD/$ ? 2.463 ($/AUD ? 0.406) and the dollar value of the portfolio has remained unchanged at $10 million. The November 40 AUD call is now worth 1.2 cents per AUD and has a delta estimated at 0.7. What is the result of the hedge?

c. How should the hedge be adjusted?

Reference no: EM132064030

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