Hi all,
Just want to clear my mind with the way to calculate the return from inter-market carry trade but hedging into the third currency For example, we have three different currencies: USD, EUR and Peso. We determine that we should implement the carry trade between USD (buy bond in USD) and EUR (sell bond in EUR) , however wish to hedge it into Peso. So generally, the formulas to calculate the return is:
(Return in USD + Return converting USD to Peso) - (Borrow in EUR + return converting borrow amount from EUR to Peso)
In case of hedging, the Return converting USD to Peso and return borrow convert EUR to Peso will be predetermined by the difference between interest rate of Peso and relevant currency