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
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.
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%