This is from you know where… page 62 of volume 2…
Having a tough time comprehending the answer also… And since wulf is in germany… should the base currency be the sterling?? Someone please help!
[question removed by admin]
base would be euro
position 5.1 / 0.75 - 5 / 0.78 = 0.3898 (gain on position)
gain / loss on futures = --5 ( 1/0.785 - 1/0.79) = -0.0403
Net Gain / loss = 0.3898 - 0.0403 = 0.3495
% = 0.3495 / (5/0.78) = 5.45%
Cpk- in this case, he is not rolling the forward ie he seem to be exiting correct?, then why calc gain between the forwards? Ie .785 which is prolly another 180 day forward
dang moderators… Thanks!
you are not rolling the forward, but there is a gain/loss on the forwards between the entry and exit. So return needs to account for that as well.
Baseball - is my answer correct?
youre right cpk.
yup. spot on. 5.45%…
not sure… but maybe its just all then numbers thats throwing me off…
Basically, if i think high level about it… itsn ot too diffuclt… basically you need to calculate how much you position in the currency changed over that peirod of them… and then calculate the change in value of the futures… then combine them and compare that to the beginning amount…
boom - now i just need to learn to execute.
Why we need to convert the investment return part in euro?
I thought the hedged return formula is using local return (ie the sterling?) =
Local return + Gain/loss on futures
Any one can explain? thanks
Local return is not same as domestic currency (translated) return.
Thus Domestic currency return = foreign asset or local return translated into domestic currency at time t by spot rate at time t ± gain or loss of hedging
I see but when I need to use the domestic currency return / local return? like now seems like i need to to convert the british asset return to euro then add the gain or loss of hedging? But what i used to know is just use the local return ie 5.1m/5m pounds + gain/loss on hedging
Whenever you invest in foreign asset, you will calculate return in your domestic currency units what also contain ±currency gains/losses. If you hedge foreign currency your domestic return is not equal foreign asset return than is foreign asset return ±gain or loss from hedging. If you may hedge with partial loss and you expect favorable foreign currency movements with less loss or even gain, you will not hedge.
If you are British, invest in GE stock on NYSE. What you interested, is stock gain in your domestic currency, GBP. If GE stock appreciated and USD depreciated toward GBP in same period you may even finish with losses measured in GDP.
So say for below example coz these are most i encountered with, the 8.5% is a local currency return? But the answer will be (0.6682/.69) - 1 + 0.085 = 5.34%, simply using the 8.5% then add gain/loss from hedging.
Any difference from that question and the one in this thread??
The expected (local currency) return on the bonds is 8.50%, and the 1-year risk-free yields are 1.3% in the United States and 4.6% in Australia. The spot exchange rate is USD0.6900/AUD1 and the one-year forward rate is USD0.6682/AUD1. USD is domestic and AUD is foreign local currency Given the exchange rate and interest rate data provided, if the Australian currency risk is fully hedged, the bond’s expected return will be closest to: A) 5.34 B) 3.90 C) 5.20
why was the question above in first message deleted?
Its from Kaplan practice exam Vol 1 exam 2 no. 41
Copyright violation.
Hi s2000 magician could you shed a bit light on the local return part when calculating total return
coz sometimes i saw in below example, i just simply use 8.5% + gain/loss from hedging. But in this thread i need to convert the local return in domestic rate then + gain/lloss hedging, Thanks!
The expected (local currency) return on the bonds is 8.50%, and the 1-year risk-free yields are 1.3% in the United States and 4.6% in Australia. The spot exchange rate is USD0.6900/AUD1 and the one-year forward rate is USD0.6682/AUD1. USD is domestic and AUD is foreign local currency
I think the return in domestic currency (USD, given AUD is fully hedged) should be [(8.5*0.69] + [{(0.6682/0.69) - 1} *100]= 2.705%. 8.5% is the return on local currency so I don’t think we can use it and directly add gain/loss from hedging (until the question specifically asks to calculate expected return in local currency terms). By default, we usually assume it as return in domestic currency. So, it seems we need to convert local currency return to domestic currency return using spot rate.
If anyone can shed some more light, that would be great.
Are these the only options for this question? Can someone throw more light on it?
[quote=“bigbclub”]
So say for below example coz these are most i encountered with, the 8.5% is a local currency return? But the answer will be (0.6682/.69) - 1 + 0.085 = 5.34%, simply using the 8.5% then add gain/loss from hedging.
Any difference from that question and the one in this thread??
The expected (local currency) return on the bonds is 8.50%, and the 1-year risk-free yields are 1.3% in the United States and 4.6% in Australia. The spot exchange rate is USD0.6900/AUD1 and the one-year forward rate is USD0.6682/AUD1. USD is domestic and AUD is foreign local currency Given the exchange rate and interest rate data provided, if the Australian currency risk is fully hedged, the bond’s expected return will be closest to: A) 5.34 B) 3.90 C) 5.20
Are these the only options for this question? Can someone throw more light on it? (Sorry for double post)