CFAI book5 pg300 Current Risk Mgmt - Blue box problem

CFA Level III Derivatives
#1

I couldn’t understand the solution given for Q2. How did they get the return on the hedge portfolio as 0 % ?

Please elaborate more on the difference b/w optimally hedged portfolio and normal hedged portfolio. Thanks.

#2

Rh = R + s(1-h) = 1% + -5%(1-0.8) = 0%

Normal hedged port hedges initial value only and not the FX exposure of the gain/loss, optimally hedged accounts for the FX exposure of the gain/loss by using regression of asset returns and FX changes.

#3

why do they ignore the cross product? that’s the part that I don’t get.

#4

can you please post the question

#5

I think there’s a footnote that says the cross product is usually so small that it’s worth ignoring.

#6

currency return = Rlc + Rs + (Rlc*Rs)?

perfromance evaluation section?

currency return = (CG + CF) +e(1+CG + CF) or (1+CG) * (1+e)

CG = capital gain

CF = dividends paid = usually 0

e = currency return