Guys I need some help it says expected local return of the AUS bond is 8.5% spot rate is 0.69 USD/AUD and forward rate is 0.67 the answer says the hedged return is 8.5 + (0.67-0.69)/0.69 = 5.6% I can understand this. But I try doing it the long way: initial capital (USD) = 100 x 0.69 final capital = 108.5 x 0.067 then final/initial -1 should equal to my hedged return right? the answer will become 5.35% as the return what am i missing???
for some reason, the CFA, whenever it asks you to compute hedged returns, what it seems to want is the return on the investment + the gain/loss on the hedge. The books are littered with sample calculations and this is always how it is done. Don’t ask why, just give them what they want.
I haven’t done it but in your example your solution is only valid if you hedge the whole amount ( principal and return)
Buckhead - because you would not know to hedge the expected return maybe
OK thanks guys I will remember this. This is not the time to understand things anymore.