Currency return fully hedged.

CFA Level III
#1

Is this true statement?

For fully hedged foreign currency, the currency return in domestic terms is equal to domestic interest rate for the period? (Provided that Interest rate parity holds)

Thanks.

#2

this is my understanding

return in terms of forward rate premium = domestic interest rate - international interes rate

local return for the period = international interest rate

total return = addition of the two = domestic interest rate.

#3

anyone?

#4

I think you might be confusing currency returns and asset returns in foreign markets. Your fully hedged currency return would be the difference in interest rates, locked in using a forward.

1+ FC / 1 + DC = (expected) Rfx -> hedge or not hedge based on economic forecast of interest rate movements

Local return = (Asset value @ T=1 / Asset Value @ t=0) -1

Rlc + Rfx = ~ Total return

#5

Well let’s assume that my asset is cash equivalent in foreign currency.

so my local return is (foreign interest rates)

my currency return ~ domestic interest rate - foreign interst rate

so total return = domestic interest rate…

This is regarding Reading 29 EOC 11.

#6

Are you saying:

Total return = foreign interest rate + domestic interest rate - foreign interest rate

=

Total return = foreign interest rate + domestic interest rate - foriegn interest rate

#7

yes…

#8

at least that’s what I made up from that EOC… not sure if its always true.