- +1-530-264-8006
- info@tutorsglobe.com

How could the investor have hedged his risk

Problem: In 1990, a Japanese investor paid $100 million for an office building in downtown Los Angeles. At the time, the exchange rate was ¥145/$1. When the investor went to sell the building five years later, in early 1995, the exchange rate was ¥85/$1 and the building's value had collapsed to $50 million.

Q1. What exchange risk did the Japanese investor face at the time of his purchase?

Q2. How could the investor have hedged his risk?

Q3. Suppose the investor financed the building with a 10 percent downpayment in yen and a 90 percent dollar loan accumulating interest at the rate of 8 percent per annum. Since this is a zero-coupon loan, the interest on it (along with the principal) is not due and payable until the building is sold. How much has the investor lost in yen terms? In dollar terms?

Q4. Suppose the investor financed the building with a 10 percent downpayment in yen and a 90 percent yen loan accumulating interest at the rate of 3 percent per annum. Since this is a zero-coupon loan, the interest on it (along with the principal) is not due and payable until the building is sold. How much has the investor lost in yen terms? In dollar terms?

Now Priced at $25 (50% Discount)

Recommended **(95%)**

18,76,764

Questions

Asked

21,311

Experts

9,67,568

Questions

Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment2015 © Tutors Globe. All rights reserved.

## Q : Compounding of interest on the future value of an annuity

Use your finding in part a to discuss the effect of more frequent deposits and compounding of interest on the future value of an annuity.