Lets say you have DC= $, FC= Yen -You have 100MM yen portfolio. At end of period it falls to 90MM (-10%) -You sell yen forward to hedge the principal the contract goes up in value by 2% by the end of the contract -The spot rate changes by 1%, with the yen strengthening against the dollar. So: R(u) = -10% + 1% (-10% * 1%) = -9.1 R(h) = -9.1% - 1(-2%) = -11.1% My question, why does the change in the spot rate change the value? ie why isnt it just -10% - 2% for -12%? How does the change in spot rate effect the transaction?
Nevermind…
You are only hedging the principal… The spot rate affects the return portion… Assume you buy a Euro Stock at 100Euros and sell forward 100Euros… The 100Euros is hedged at the forward rate… But let’s asssume that stock rised to 110Euros… There will 10Euros unhedged that you will convert at the spot rate… R(Unhedged) = R(LC) + R(FX) + [R(FX)*R(LC)]
VinceMTL Wrote: ------------------------------------------------------- > You are only hedging the principal… The spot > rate affects the return portion… > > Assume you buy a Euro Stock at 100Euros and sell > forward 100Euros… The 100Euros is hedged at the > forward rate… But let’s asssume that stock rised > to 110Euros… There will 10Euros unhedged that > you will convert at the spot rate… > > R(Unhedged) = R(LC) + R(FX) + Thanks it took me a second to think it through
R(FX) = futures return or spot return here?
level3aspirant Wrote: ------------------------------------------------------- > R(FX) = futures return or spot return here? Spot. Then for R(H), its R(H)=R(U)-H(R(Forward))
thanks 1more.
what is the formula for R(hedged)?
Is this correct? R(UH) = (-10%) + (1%) + (10%)*(1%) R(H) = (-10%) + (2%)
LaGrandeFinale Wrote: ------------------------------------------------------- > Is this correct? > > R(UH) = (-10%) + (1%) + (10%)*(1%) > R(H) = (-10%) + (2%) R(u) = -10% + 1% (-10% * 1%) = -9.1 R(h) = -9.1% - 1(-2%) = -11.1%
Can you tell me the Schweser page number? I am drawing a blank on the 2nd formula you using.
Is the hedged formula VtSt - VoSo - (Ft - Fo)*(St - So)/So ?
(VtSt-VoSo)/VoSo - (Ft-Fo)/Fo
Whats the -1 then? Isn’t that the change in the spot rate? How do we incorporate that in the formula then?
^ what do you mean? (VtSt-VoSo)/VoSo - (Ft-Fo)/Fo = (VtSt/VoSo -1) - (Ft/Fo - 1). Is that what you mean?
R(Hedged) = R(LC) + R(FWD) + [R(SPOT)*R(LC)]
I’m using Stalla on this. They use Return unhedged = return of asset in local market + return of local currency +( return of asset in local market + return of local currency) Return of local currency = S(t)-S(0)/S(0) Return hedged = return unhedged - hedge ratio (return of forward contract) Return of forward = F(t)-F(0)/S(0)
I don’t think the answer is right. I agree with the unhedged position. Yea the return should be unhedged plus return on fututres. Futures it says, your value went UP 2%. So you add 2%. What I don’t understand is, it says you sold yen and your value went up but yen appreciates spot. Isn’t that contradicting? Maybe I really forgot how to do math here but -9.1% - 1(-2%) does not equal to -11.1% it’s 7.1%.
Sorry, I just got back to AF after a whole day. With regards to my post, the formula posted was R(u) = -10% + 1% (-10% * 1%) = -9.1 R(h) = -9.1% - 1(-2%) = -11.1% And you corrected mine to (VtSt-VoSo)/VoSo - (Ft-Fo)/Fo The first part (VtSt-VoSo)/VoSo is the unhedged. I get this. Is the second part - 1(-2%) = -11.1% the same as - (Ft-Fo)/Fo. If so, whats the -1 ? Is that the change in the spot rate from the problem? That’s what I was wondering. Hope I am much more cleared now if I wasn’t earlier. Thanks.
-1 must refer to the proportion hedged at outset