CFA EOC Reading 22 page 151 question 20

CFA EOC Reading 22 page 151 question 20, there is a question for finding highest expected hedged currency return.

  1. I thought we need to find hedged forward premium and discount dictated by IRP and whichever has higher positive figure gives highest expected return.But the solution shows country that has highest local market risk premium give highest expected hedged return.Please explain where i am going wrong.

  2. What’s the impact here when there is no change in interest rates?

The Hedged Return = Rl + f = Rl + id – if = id + (Rl – if)

Where Bonds local risk premium = (Rl – if)

The reason they’re looking at just the bond local risk premium is because for all three it’s the same i d

All we’re looking at is (Rl – if) for all three and it is greatest for the Japanese bond and therefore, the hedged return is greatest for it.