Ok, what am I doing wrong. Shouldn’t the unhedged dollar return and the hedge return come back relatively close to the return in local I’m seeing a local return of 6.7 (320,000-300,000/300,000) US Return of 16.4 (384,000-330,000/330,000) Return on contract -7.3 -(1.23-1.15*300,000/330,000) Hedged return of 16.4 - 7.3 = 9.1 © Why doesn’t it come back to 6.7 (or very close) considering the principal’s been hedged? Sorry if I missed something stupid. I’ve been looking at this for 45 minutes. I can’t waste anymore time on one problem. Thanks in advance.
Probably because the 6.7% local return doesn’t take into account the currency changes? Local return is just the change in the values. Its when you want to look at it from a domestic viewpoint, you take the currency changes.
I don’t know. I think I may be missing something. It seems to be a big difference in return to be due to “only hedging the principal”. Maybe The other example in Schweser (book 4 page 117 - 119) shows this local return of 5.00 (1,050,000-1,000,000/1,000,000) US Return of 3.96 (1,339,800-1,288,800/1,288,800) Return on contract .993 -(1.2763-1,2891*1,000,000/1,288,800) Hedged return of 3.96 + .993 = 4.95 (Much closer to Local)
I guess the reason is the euro appreciated so much. look at unhedged return, it is 16.4% much higher than the 9.1%
Yeah, must be. It was a big move. I was concerned as the other examples the hedge at least got you pretty close so it was a good check to make sure you didn’t screw up a calc.