# Currency Hedging

CFAI books, reading 46 end of chapter Q, #2. Typically when computing the hedged return on a foreign portfolio, i’ve taken the unhedged return plus the % change between the forward rates for t+0 & t+1. Doing it that way I am coming up with 3.58%; however the correct answer is 2.98% (when doing it the “long” way). Am I totally missing something here or is there a legit reason why these numbers are not tying off? Both methods seemed to tie off on every other Q I have looked at. The CFA Mock has a similar example that did it unhedged + %Chg in forward.

When you do the calcs the “long way” - which is to convert all the gain/ loss to (assuming it is the DC), you will eventually divide the total G/L (p/f + fwd) by initial p/f value in (converted using initial spot rate). If you just add the % G/L of the p/f & the forward, then the nbrs are slightly off bcoz this method doesn’t account for diff in the initial delta between spot & forward rate. When the initial spot & Fwd rates are pretty close and the swing in rates are small, the diff in the two methods shrinks. So if you need to get it exactly right, the first “long” approach is better. - BN

They have to make it difficult, dont they? I guess I will do it the long way on the exam, although I find it funny that their mock exam uses the shortcut!

I would look at the answer choices and if they are not very close enough(like 3.2%, 3.4% etc) then I would use the simpler option like you very trying to do and get it done with rather than going through the time consuming calculations.

Its not really that long though. Just 2-3 short calculations. 1) Convert values at beginning and end to domestic 2) Calculate Payoff of Fwd and convert to domestic 3) Calculate Return in domestic Compare this to the implementation shortfall calculations…