The question asked for the notional principal of the GBP forward contract hedged for both equity market risk and currency risk. The CFA answer uses the foreign market risk-free rate to arrive at GBP 15,107,250. I, however, distinctly recall that the fully hedged foreign asset earns only the domestic (and not foreign) risk-free rate, contrary to the answer. I think that the foreign risk-free rate would be earned if only the equity portion of the risk was hedged which is what I used to (incorrectly) answer Q#46. What do you guys think?
That’s what I thought: foreign risk free rate is utilized if you are hedging just the equity risk. Domestic if you are hedging both. I haven’t seen the mock exam so maybe there is something else within the question?
the question asks for what is the notional GBP principal on the forward contract. since the equity market is hedged the portfolio would only earn the rocal Rf rate and that would be the notional on the forward contract
I see, donag, it is asking about the forward only and not the overall position of equity+forward. Thanks!