SS8 says domestic return = local return + change in foreign currency + (local return)*(change in foreign currency) SS10 on bonds says domestic return = nominal local return + currency return Why is there no interaction variable on the SS10 equation? Is the way to know the difference between the 2 that SS8 is the dollar amount, while SS10 is the % change?
I struggled with this contradiction as well. Which one to use on the exam ?
I don’t know which one to use. Also, SS18 has Return domestic = capital gain + income + currency, where currency is % change multiplied by (capital gain + income) So this is similar to SS8 except it breaks local return into CG and I. All these formulas are tricky for me to remember how to apply when your given data that is all over the map
Does anyone have an answer to this? I’ve been looking through the material again and am still stuck on this
ss10 it is not exactly equal, see formula in text. the " (local return)*(change in foreign currency)" is left out, it is quite small…
IMO, SS10’s formula is for bond analysis, which has a relatively low return. So the estimate R=R_LC+R_S makes sense. Also, its purpose is to determine whether to hedge the currency risk or not – based on Interest Rate Parity and the manager’s expectation on currency change. SS08’s formula is accurate and applies for all securities, but it’s more for an ex-post analysis.