The return on hedged portfolio is zero. Can sombody help me get back to sanity? If hedged return is zero (after translation and forward contract) why the hell would someone buy foreign asset? Why would you even construct a hedge? Investor might as well keep the cash under mattress. I thought we are trying to hedge either the translation risk and/or the economic risk (local currnecy correlated with local asset return) but I didn’t realize that final asset return is zero after that.
Anyone?
my 2 cents on this: suppose i am an US investor (US stocks yield 5%) and want to invest in UK securities yielding 7% in FC terms. I would like to enjoy the higher 7% return on UK securities but would like to hedge all other risks from transalation / adverse currency movements etc. so that higher returns dont get washed away due to Euro depreciation or something. hence i would like to lock in a return of 7% on UK securities, even when converetd to domestic USD. not sure if i have explained it in the best possible manner. any other thoughts are appreciated.
Guys Think of sources of return from GPE chapter. If you hedge the currency all you are doing is making your Currency Allocation Contribution is zero. This is to be on safe side since manager can concentrate on his core task of Market Allocation and Security Selection without worrying about currency . So you still have other sources of return to domestic portfloio Like MAC and SSC I hope this explains your question.