unhedged return... local, return, understand

Zesty

am confused....dont understand how it's calculated?... is it the same as local return+currency return+product of the the two?

justin88

Simple, from a fundamental standpoint:

Beginning investment value in DC at time 0 = Foreign currency amount at time 0 * spot rate at time zero

(fast forward to when the return happens)

Ending investment value in DC = Foreign currency amount at time T * spot rate at time T (use the prevailing spot rate to convert the foreign currency investment, which has NOT been hedged)

The reason it is unhedged is because no futures or offsetting transactions have been made to hedge the foreign exchange risk of the portfolio (economic or transaction).

From a "symbol" perspective, unhedged return is: LC return + change in spot rate

i.e. You are a US investor with British assets: you achieve a 5% return on the British assets in pounds, but also experience a 2% decline in the value of the GBP (so you get less pounds back into USD at time T) gives you a net "unhedged" return of 3%.

canadiananalyst

i meant from international bond investment perspective..