As the risk manager for a large pension fund, you know that the investment staff is considering a move to diversify the portfolio over the next six months by investing $900 million in Japanese government bonds Although you like the investment profile of these securities, you are concerned that adve...

a If pension fund invests in bonds they can use the current spot rate to calculate how many bonds they will receive today for 900 million We can assum ...

As the risk manager for a large pension fund, you know that the investment staff is considering

Question:

As the risk manager for a large pension fund, you know that the investment staff is considering a move to diversify the over the next six months by investing $900 million in Japanese government bonds. Although you like the investment profile of these securities, you are concerned that adverse foreign fluctuations could reduce or even eliminate the expected returns from owning the bonds. Consequently, you want to consider a hedge against this exposure using currency futures contracts.
a. Describe how a currency futures contract position could be employed along with the purchase of the bond in this situation to mitigate the risk exposure the risk manager is concerned with.
b. Explain what would happen to both the currency futures position and the underlying bond holding if the USD/JPY moved up unexpectedly after you initiated the FX hedge transaction.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...