FI topic test Chung hedged return

why do we get a different answer if you use (F-S/S) + local currency bond >>>like in problem 6

-3.15 + 8.5 = 5.34%

i tried doing it F/S * local currency bond return >> multiplicative like in other examples??

.9684 * 1.085 = 5.07%

Return on a bond denominated in a foreign currency:

Rp = Rl + Rc ~= Rl + (id - if)

In this case, however, they give you the the forward rate .6682 and they ask for the hedged return. So I assume this to mean I need to use the fwd/spot rates given.

Someone can correct me here, but here’s how I do it;

  • Check if interest rates properly predict forward rate: (1+id / 1+if)*S0 = or does not = F. Aka covered interest rate parity. In this case, it hold

  • If it does, then I take the F/S - 1 and that is my Fdf return or–in this case—3.15%

  • Take return on bond (domestic lc) 8.5% + hedged return - 3.15%

ok… so the “bond return in foreign currency” is the formula above (additive) and other examples that are foreign assets-portfolios use the multiplicative formula Rfc*Rfx

it just doesnt make sense to me why the result is different and why use one or another

Unhedged return:


Hedged return:

RL + Fwd premium/discount


I believe the additive method is normally the way to go.