Pretty overwhelmed with the number of formulas on this topic which seem to boil down to the ones below - can you guys let me know if this sounds about right: 1. (ex-ante) Expected domestic currency return = ‘Expected foreign currency interest rate return + expected inflation differential’ OR ‘Expected foreign currency interest rate return + nominal change in foreign currency appreciation’ 2. ‘(ex-post) Actual domestic currency return’ OR ‘Unhedged expected domestic currency return’ = ‘Expected foreign currency interest rate return + nominal change in foreign currency appreciation’ OR ‘Expected domestic currency interest rate return + real change in foreign currency appreciation’ OR ‘Expected domestic currency interest rate return + FCRP (expected foreign currency appreciation minus interest rate differential)’ 3. Hedged expected domestic currency return = ‘foreign interest rate + forward premium (this is equal to the risk free interest rate differential)’ OR ‘Foreign currency return + percentage gain on the foreign currency forward’
r u using schweser ? If so, on the back side of each book they have formulae, which will make your life much easier at this time.
I am. I just wanted to check whether the various ways of deriving each of the returns above are in line with everyone’s understanding.