1. 1. Given the data in the tables below, calculate the following to four decimal places…
a. The EUR-GBP spot exchange rate.
b. The EUR-GBP exchange rate one year forward.
given:
Spot exchange rate
EUR-USD=1.08
GBP-USD=1.24
1-year interest rate:
GBP:2.00%
EUR:0.50 %
2.You are considering investing in a hedge fund with only one employee, the manager. The costs of running the fund for the next year, including the manager’s salary, are known and fixed at $100,000.
The manager’s year-end bonus will be 20% of the profits (= revenues – costs) of the fund if revenues are greater than costs, and zero if revenues are less than costs. Investors are paid whatever is left after the manager’s bonus is deducted.
a. Draw the manager’s year-end bonus as a function of the fund’s revenues.
b. Draw the payoff to investors as a function of the fund’s revenues.
The fund manager is considering investing in one of two strategies: strategy A has an expected return of 5% and a standard deviation of 30%; strategy B has an expected return of 5% and a standard deviation of 15%.
c. Which strategy maximizes the present value of his year-end bonus? Explain carefully.
d. Which strategy is the best choice for the investors? Explain.
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