hey guys, when asked to get the hedged returns for foreign bonds, are we supposed to: - get the RFR in the domestic ccy then add the foreign premium return ( foreign return - foreign domestic). or - add the interest rate differential (assuming this is equal to fwd or discount) to the foreign return thanks, M.
If position of foreign bonds is hedged against both price and currency risk, then you get domestic risk-free return. 1) hedge price risk -> get foreign risk-free rate 2) hedge currency rate - > get interest rates differential: domestic risk-free rate - foreign risk-free rate 1)+2) hedge both - > get domestic risk-free return
SerGrey Wrote: ------------------------------------------------------- > If position of foreign bonds is hedged against > both price and currency risk, then you get > domestic risk-free return. > > 1) hedge price risk -> get foreign risk-free rate > 2) hedge currency rate - > get interest rates > differential: domestic risk-free rate - foreign > risk-free rate > 1)+2) hedge both - > get domestic risk-free return thanks but when are we supposed to: - get the RFR in the domestic ccy then add the foreign premium return ( foreign return - foreign RFR)? thanks!
It looks like only hedged currency position (domestic RFR - foreign RFR) and unhedged equity position (foreign return). Like you invest in BOVESPA index (in BRL) and sell BRL vs USD forward. In result you get BOVESPA index return denominated in USD.