Proxy hedge: Cd+ (ri – Ci ) + [(ed,I -ed, j) –fj,I] where 1)the portfolio manger may expect j’s currency to underperform I’s , relative to domestic currency [i.e., [(ed,I -ed, j) –fj,I]>0 2)It may be more costly or not possible, to establish a hedge in currency i. It is necessary that I and j are highly correlated for the strategy to be effective How to realize the formula and explanation above? for the Unhedged: Rd,u = Cd+ (ri – Ci ) + (ed,I- fd,I ) Excess return components; 1)Risk free rat in domestic currency, Cd 2)The excess return of the asset over the risk free rate in the asset’s currency (foreign risk premium),ri – Ci 3)The asset’s excess currency return versus the domestic currency (ed,I - fd,I) Thanks
Any one can help me deduce the formula of proxy hedge from trhe unhedged formula above? Thanks!
Do not recall seeing that in material this year. Had understood calculations on proxy/cross hedges were dropped from material this year. Are you sure this is in scope?
I checked the fixed income portfolio managment -part II of Volume 4. It seems that no related topic about the calculation on proxy hedge.