A trader in India expects international gold prices to appreciate from USD 1500 per ounce to USD 1800 in next six months. To benefit from the view, he buys 30 grams of gold at Rupees 22,000 per gram and also sold 6 month USDINR futures at 46. After six months, gold prices appreciated to USD 1800 per ounce and the trader sold gold at Rupees 24,000 per gram and unwinds currency futures contract at 44. Assuming 1 ounce is equal to 3 grams, how many lots of currency futures would he have used to hedge the currency risk and how much was the real return for the investor?

      A trader in India expects international gold prices to appreciate from USD 1500 per ounce to USD 1800 in next six months. To benefit from the view, he buys 30 grams of gold at Rupees 22,000 per gram and also sold 6 month USDINR futures at 46. After six months, gold prices appreciated to USD 1800 per ounce and the trader sold gold at Rupees 24,000 per gram and unwinds currency futures contract at 44. Assuming 1 ounce is equal to 3 grams, how many lots of currency futures would he have used to hedge the currency risk and how much was the real return for the investor?

        a) 15 lots, 13%  

        b) 18 lots, 12%  

        c) 15 lots, 13.6%

        d) 18 lots, 13.6% 

     Explanation:

      Trader buys 30/3 =10 ounce & pays 1500*10 = 15000 USD. He has risk of USD depreciating so he is hedging of USD of 15000/1000 = 15 lot

He sold 6 months USDINR future contract at Rs 46 & squared it off at Rs 44.So he got benefit of (46-44) =2*1000*15 = 30000.

He buys gold in Rs 30*22000 =66000 & sold it on 30*24000 =720000. He got benefit of 720000-660000 = 60000. (in 6 months)

Total benefit during 6 months period = 30000+60000 = 90000

Percentage real rate of return would be (90000/660000)*100% = 13.6%