Reading 25 Study Session 10 EOC # 20 Foreign bond return

CFA Level III
#1

Hi All,

My first question for Level 3 on this forum. Yoohoo.

Please refer to EOC Q. 20 on page 153 of curriculum Volume 4.

Question asks for highest hedged return.

Solution calculates the hedged foreign bond return as = domestic bond return + excess return in local currency. This I understand.

Why could I not have calculated this as follows.

foreign bond return for UK = local return in UK (5.04) + currency appreciation (0.1) = 5.14 percent and so on.

If I had calculated this way, my answer would have been different from the solution.

Your response is much appreciated.

Regards

#2

OK, I have the answer now after going over Q. 21.

My calculation cited above will be for unhedged return, not for hedged return.

I was assuming that expected currency appreciation is being derived from the forward market prices. Apparently Not. Expected was from manager’s expectations I guess.

Please correct me if I am wrong in my analysis here.

#3

you are right - that formula

Local Return + Currency Appreciation = Unhedged Return.

#4

Hi cpk123,

Thanks for taking the time to look up the curriculum book and confirming my answer. I surely appreciate it.

PS