Two formulas for domestic return on a foreign portfolio: 1) Return=Capital Gain + Currency Appreciation + (Capital Gain)(Currency Appreciation) 2) Return=Capital Gain + Income Yield +Currency Effect, where Currency Effect=e*(1+Capital Gain+Income Yield). When do I use 1) or 2)?
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Sorry I don’t understand desperatestudent. What do you mean?
i thought they are both the same except 1 assumes no recurring income (i.e rental income) but only capital gain whereas 2 assumes there are income and capital appreciation. Note the currency effect affect income and capital gain components.
equation 1 = fully hedged… equation 2 = only the principal is hedged equation rarely happens unless they specifically tell you.