I see these questions where the currency returns for the portfolio is different from the benchmark.
How is that possible?
The exchange rate changes for both the portfolio and the benchmark are going to be the same, say from Jan 1, 2007 to Jan 1, 2008.
Is it because there may be currency conversions midway through the year?
J
I suppose another reason for the difference could be that the manager could be pursuing currency management by entering into currency futures etc.
You measure yourself against a benchmark, but the manager is probably active, so he will be taking currency bets, as UMUC said, hedging or not hedge and putting money in countries with better potential for currency appreciation.
currency = currency% x (1 + underlying change% + underlying yield%)
I mean, if the stocks you hold move higher than the ones of the benchmark, the currency effect will be magnified (and viceversa)
hala_madrid Wrote:
——————————————————-
> currency = currency% x (1 + underlying change% +
> underlying yield%)
>
> I mean, if the stocks you hold move higher than
> the ones of the benchmark, the currency effect
> will be magnified (and viceversa)
No. Suppose the stocks that you choose increase by 4% and the currency appreciates by 2%, your total return will be 4% + 2% (subject to linear approximation).
my stock = up 10%
currency = up 10%
benchmark stock = flat, 0%
my return = 10% + 10% x (1+10%) = 11%
bm return = 0% + 10% x (1+0%) = 10%
there is a difference of 1%, even though currency went up 10% for both…
hala_madrid Wrote:
——————————————————-
> my stock = up 10%
> currency = up 10%
> benchmark stock = flat, 0%
>
> my return = 10% + 10% x (1+10%) = 11%
>
> bm return = 0% + 10% x (1+0%) = 10%
>
> there is a difference of 1%, even though currency
> went up 10% for both…
Because you have large changes in both, the linear approximation is no longer accurate.
Essentially the difference of 1% = 10% * 10%. It is only a second order effect.