# 2008 - Tanaka Global Fund

For Part B, in calculating the return from the futures contract, can someone help me understand why they are using the 900M and 700M instead of the number of contracts which are 9,000 & 7,000?

Futures returns in Yen (¥ millions): Yen Gain/(Loss) on \$ futures = (115.70 - 110.77) x 900 = 4.93 x 900 = ¥ 4,437 Yen Gain/(Loss) on € futures = (156.70 - 144.80) x 700 = 11.90 x 700 = ¥ 8,330 Hedged Yen return = Unhedged Yen return + Futures returns in Yen (¥ millions)

Makoto Satou manages the Tanaka Global Fund, a Japan-based investment fund, which has USD 900 million invested in the U.S. and EUR 700 million invested in Europe. Tanaka Global Fund’s home currency is the Japanese yen (JPY). On 1 July 2008, Satou decides to fully hedge the fund’s currency risk for the next two months. Data are presented in Exhibit 1.

Exhibit 1 Foreign Exchange Rates 1 July 2008 Spot rate (JPY/USD) 115.90 Spot rate (JPY/EUR) 155.75 September dollar futures contract (size = USD 100,000) (JPY/USD) 115.70 September euro futures contract (size = EUR 100,000) (JPY/EUR) 156.70

A. State the futures positions the Tanaka Global Fund should take on 1 July 2008, to hedge the fund’s currency risk. Calculate the number of contracts needed to hedge. Show your calculations. (3 minutes)

On 1 September 2008, Tanaka Global Fund’s U.S. portfolio has increased to USD 945 million; its European portfolio has increased to EUR 735 million. Current foreign exchange data are presented in Exhibit 2.

Exhibit 2 Foreign Exchange Rates 1 September 2008 Spot rate (JPY/USD) 110.90 Spot rate (JPY/EUR) 144.75 September dollar futures contract (size = USD 100,000) (JPY/USD) 110.77 September euro futures contract (size = EUR 100,000) (JPY/EUR) 144.80

B. Evaluate the effectiveness of the Tanaka Global Fund’s hedge by comparing the fully hedged portfolio return with the unhedged portfolio return. Show your calculations. (6 minutes)