Reading 26, Example 9
Please correct me if i’m wrong, I’m trying to get a better understanding of this interst rate / currency hedging stuff.
So if you have a Euro denominated bond, and want to hedge it back to the US in 1 year. Lets say you hedge it with a forward contract.
That forward contract rate / currency exchange you locked in represents the future exchange rate factoring in the US risk-free return rate? correct?
When you execute that future in 1 year, you have hedged the Euro interest rate and currency rate risk?
So in the end your return components are the US interest rate + USD currency rate?
I’m just having trouble understanding all the moving parts of why we take certain steps and what it means.
thanks,