Could someone please clear my head. 1 )Domestic Currency Return = Foreign Currency return + Foreign Currency Appreciation 2) Domestic Currency Return = Foreign interest rate + Foreign Currency Appreciation 1) and 2) don#t give the same answer. Is 2) used ONLY for bonds?? thanks
There are 2 equations in PM which may be what you are referring to Domestic currency return = 1. Domestic RF rate + foreign currency risk premium 2. Foreign RF rate + expected exchange rate movement Both equations are the same by definition simply because foreign currency risk premium = (expected exchange rate movement) - (domestic rate - foreign rate). There is an end-of-chapter question 11 in chapter 70 of the CFAI text which covers this.