Please explain this
US based portfolio manager
Germany 5 year annual yield 0.2%
euro expected to appreciate 0.75%
6 months US rate 1.2%
6 months euro rate -0.4%
Forward premium (euro) 0.8%
So unhedged return is 0.2%/2 + 0.75% = 0.85%
hedged return is 0.85% + 0.8% = 1.65%
Why is hedged return 1.65 ? i feel Rfc should be 0.1% and Rfx should be 0.8% that makes Rdc = 0.90% …Please explain where my understanding is wrong?