SS10: R25: Q19 and 20: Hedged and unhedged return: page 160: Q19 and Q20:
what is the reason a hedged return is rd+(Rl-rf)
while unhedged return is bond local return + currency appreciation ? Thanks.
with a hedged return, you earn the return on the bond RI plus the foward premium/discount
the forward premium is rd-rf because you gain when your rate is higher than forign rate because it means your currency will sell cheap in the forward and thus you get more of your currency
so your total return is ri + (rd-rf), rearrange it, it become rd+(ri-rf), cfa seems to have talked a lot about this, like they discovered e=mc^2, oh well…
unhedged, you earn ri + appreciation, here appreciation took the palce of the premium cause you are no longer locked in, you are at the mercy of the appreciation