Our investment manager hedges a portfolio of German Government bonds with a 3-month forward contract. The current spot rate is Euros. 94/US$ and the 90-day forward rate is Euros. 91/US$. At the end of the 3 month period, the German Government bonds have risen in value by 3.00% (in Euro terms) and the spot rate is now Euros. 85/US$.
a. If the Bonds earn interest at the annual rate of 4.00%, paid quarterly, what is the investment manager's total USS return on the hedged German Government bonds?
b. What would the return on the German bonds have been without hedging?
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