Hi, Schweser Book 5, p. 112 says that the principal is to be hedged. CFAI mock exam says Q47 says that the notional principal is not only the principal, but principal*(1+Rf)^t So what is right? Thank you!

You were hedging the mkt risk and currency risk I believe. Since you are hedging the Mkt risk you know you will have V*(1+rf)^t dollars in X time b/c you should earn the Risk-free rate…now to be perfectly hedged on the currency side you need to hedge the exact amount of dollars, well we know this b/c we are earning the Rf rate and therefore we won’t be under or overhedged and will be “perfectly” hedged.

Thanks bigwilly. So why is Schweser hedging the 1 million notional principal only? No interest rate to be added. Their notional principal in B5.p122 is 1,000,000, nothing else. Thanks!

here is a kicker: US-based investor invest in Japan equity. What is the rate of return if he perfectly hedge his Janpan Equity exposure? What is the rate of return if he perfectly hedge his Japan eqity exposure and his Japanese currency exposure? …

I believe on the sample/mock exam they wanted a PERFECT hedge.

bigwilly: is that because they said “both UK equity market risk AND currecny risk are hedged”? Thanks

ws Wrote: ------------------------------------------------------- > here is a kicker: US-based investor invest in > Japan equity. > > What is the rate of return if he perfectly hedge > his Janpan Equity exposure? > jap RFR + whatever happens to the currency (as it is not hedged) > What is the rate of return if he perfectly hedge > his Japan eqity exposure and his Japanese currency > exposure? US rfr

^Perfect!! I thought it can help in heat of the battle.

be honest: if you face one of these questions, where you KNOW FOR SURE that everything is hedged so you will get your local RFR… will you still do the calculations or just pick the answer with your local RFR?

^Honest, I did. Then I felt like an idiot afterward.

Why is Q47 on the mock then saying that it earns the FOREIGN (not US) risk free rate? What I read from hala_madrid it should have been the US risk free rate?

he gets the US risk free rate… but the trick here is that they are not asking about that they just ask what is the notional to be hedged (that you can complete “in order to get the us rfr”)

hala_madrid Wrote: ------------------------------------------------------- > he gets the US risk free rate… but the trick > here is that they are not asking about that > > they just ask what is the notional to be hedged > (that you can complete “in order to get the us > rfr”) Now I got it. Thank you very much.