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Mr. James K. Silber, an avid international investor based in the United States, plans to...

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Finance

Mr. James K. Silber, an avid international investor based in the United States, plans to buy 10,000 shares of BMW stock. The current price is 70.75. The current exchange rate is $1.1834/. He is interested in speculating on the stock but he does not want to assume any currency risk. He plans to buy the stock now and hold it for six months. The appropriate currency futures contract currently is trading at $1.1908 today. Assume he uses a six-month futures contract to hedge his foreign exchange risk. Assume that in six months the stock price is at 74.25, the spot exchange rate is $1.2000/, and the relevant futures price is $1.2103. The euro currency futures contract size is 125,000. Determine the effective annual dollar rate of return for Mr. Silbers combined portfolio of foreign stock investment and currency futures hedge. For simplicity, assume no dividend payouts from BMW.

Multiple choice: a. 9.56% b.4.67% c.11.50% d.5.60%

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