How do you calculate this when you have done hedging? I am now reading p.117, Schweser book 5, where hedged return for a foreign currency investment is calculated. In the calculation for Rp (the hedged return), the futures return component is (Ft - F0)/F0, where F0 is the initial futures value. However, equation (46-4) on p.162 of CFAI vol 6 says the futures return is given by: Rf = (Ft - F0)/S0, where S0 is the initial spot rate. I think that Schweser is wrong with the formula and the calculation in that example (though the wrong calc doesn’t really affect the answer much). Am I correct? - sticky
The S0 in denominator in the CFAI text comes not because (F1-F0)/S0 is the return on futures contracts but because of dividing the gross profits on the hedged position by initial. .investment to get the return. It is elementary 2-line algebra. Schweser is off on this - you should check the errata.