Given a US investor, he invest in S&P and get domestic currency return of 5%, he also invest in UK and get UK pound return of 7%, spot rate=1.5 USD/Pound, US 1 year interest rate is 3% and UK 1 year interest rate is 4%, he short a one year pound Forward contract, with forward price 1.3 USD/Pound.
if fully hedged, what's the USD return for his UK market.
I think it is 7% (UK pound return), is it correct?作者: Windjam 时间: 2011-7-11 19:16
He had a negative 7.4 return.
Example:
Take $500 and invest in UK market at 500 / 1.3 = 333 Pounds
Grows to 333 x 1.07 = 356 pounds in one year.
Uses forward to convert into $: 356 x 1.3 = $463
Loses 7.4%作者: mik82 时间: 2011-7-11 19:16
if it is 80% hedged, how to calculate? under which circustance, we have partial hedge instead of fully hedged?
If it is fully hedged, I think it should be 7%+(1.3-1.5)/1.5=-6.3% instead of -7.4%作者: strikethree 时间: 2011-7-11 19:16
linping85 Wrote:
-------------------------------------------------------
> if it is 80% hedged, how to calculate? under which
> circustance, we have partial hedge instead of
> fully hedged?
>
> If it is fully hedged, I think it should be
> 7%+(1.3-1.5)/1.5=-6.3% instead of -7.4%
I have never seen the total return being calculated like that. Currency return is always taken out after you have got the total return in US$作者: cityboy 时间: 2011-7-11 19:16
