In a hedge of translation currency risk (i.e. a simple hedge of the principal), the manager would hedge the €400,000 principal. The manager shorts the Euro to hedge their long Euro position in the European stock. The loss on the futures contracts in dollars = €400,000 × ($0.98/€ –$1.03/€) = −$20,000.
The profit on the unhedged portfolio in dollars = (€420,000 × $1.07/€) – (€400,000 × $1.02/€) = $449,400-$408,000 = $41,400.
In net, the investor has made a dollar return of (−$20,000 + $41,400) / $408,000 = 5.25%
