Reading 23 EOC Q 21- Highest unhedged retrun:
I do not get their difference in these formulas- I saw this before and was like R local + App/dep = Rl*app/ dep.
In the answer they just add these two? can you do that? Man, I’m so confused with all fx stuff!!!
Help please
JSobes
#2
It’s basically (1 + Rbond) x (1 + currency return) if unhedged, and (1 + Rbond) x (1 + currency Rf/1+ Domestic Rf) if hedged.
Yes you can add, but we multiply and it’s more specific
But when you add vs. this above formula, the answer is different.
JSobes
#4
Not really, maybe slightly.
Rf (US) = 4.8%
Bond Return (Japan) = 8%
Rf (Japan) = 5%
If hedging:
=(1.08)*(1.048)/(1.05)= 1.078-1 = 7.79% return
Or: 8% + (4.8%-5%) = 7.8%