if both equity mrkt risk and currency risk have been hedge, then should leave the investor domestic rate. which should be USD RFR. Why the answer says foreign RFR (UK Pounds RFR)? or i recalled something wrong? Bigwilly, need your help!
i saw the BW light in the sky and came running. I dont recall of the top of my head what the details were, but If you hedge the Mkt and Currency Risk you are correct that you will earn the Domestic Rf rate. If you hedge Mkt risk, you will earn teh Foreign Rf rate plus any currency return. If you hedge Currency risk, you will earn roughly the foreign mkt return. Are you sure the investor was US?
investor was in the US but the question asked for the notional return on the pound - - kind of a trick question bc they said they hedged the currency but it was irrelevant
they say that ONLY for the first step, ie, solve how much will be the portfolio IN GBP assuming that you hedge the stock market risk = GBP risk free rate they ask you to solve how much GBP will that be, and that would the notional of the currency fwd of course you are right and, by using that fx fwd to hedge currency risk, you would end getting your local (USD) risk free rate, but I guess that is not what they are asking
ah, i c, you are all smart people. Thanks!