Foreign Bond Returns - CFAI Question
in the CFAI 2010 mock exam there is a question regarding foreign bond returns, that i just can't seem to understand the answer and was hoping someone could help. (its question 54 for anyone whose done it)
Question is - Basically expected Local return is 8.5%
1year domestic Rf rate is 1.3%
1year foreign Rf rate is 4.6%
Spot rate is 0.69domestic/1foreign
1year forward rate is 0.67domestic/1foreign
question is if the foreign currency is fully hedged, the bonds expected return is -
A)3.9%
B)5.2%
C)5.6%
(for bonds)
I would expect B as R(domestic) = R(local) + R(currency)
As R currency is approx = i(domestic) - i(foreign) = 1.3 - 4.6 = -3.3%
R(domestic) = 8.5 - 3.3
= 5.2% answer B
however the correct answer is C
the reason is R(currency) = (F - So) / So = 0.67 - 0.69 / 0.69 = -2.9%
R(domestic) = 8.5 - 2.3 = 5.6%
i've checked the books and apparently the two equations for bond currency return should equal each other, however in this case they don't. I'm confused as to why they've used one equation over the other anyone. Any ideas? |
发表于 2011-7-13 13:17
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