2. Suppose that you - as a Korean national-bought one share of a U.S. stock at $

Question

2. Suppose that you - as a Korean national-bought one share of a U.S. stock at $25 exactly one year ago. Now the stock price is $35. During the period, the U.S. dollar has appreciated by 10%. What is the return on this stock investment in terms of Korean won? In other words, what is the "unhedged" return on this stock investment? 3. Continuing on #2, this time, suppose that you wanted to hedged (at the time when you purchased the stock) the currency risk by selling U.S. dollars forward. To hedge the currency risk perfectly, how many dollars did you need to sell forward (regardless of whether it was feasible or not at the time of the purchase of the stock)?

Explanation / Answer

2.) Korean National bought share at $25. After one year price is $35.

Suppose initially $25 were fetching 'X' Korean won. So initially the Exchange rate was X/25 (Korean won per US $)

After one year the exchange rate depreceiated by 10%. So now exchange rate is X*0.9/25 (Korean won per US $). Jorean won actually decreased by 10% because of US Dollar appreciation.

Rate of return: {[X*0.9*35/25] - [X] }/ [X] = 0.26 = 26%

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