Darien

This is a legitimate question. And rather straightforward if you ask me.

Rb = Rl + Rc


Where:
Rb = Return on Bond (Domestic Currency)
Rl = Return on Bond (Local Currency)
Rc = Return on Currency Implied by Market (i.e., forward premium/discount)*
= (Forward - Spot ) / Spot

As such:

5.60% = 8.5% + [(0.67-0.69)/0.69)]

5.60% = 8.5% + (-2.9%)


*You cannot use IRP here, because IRP is theory, not actual market numbers. You cannot hedge IRP, but you can hedge using forwards in the markets. That is why the discount is not -3.3%. This is the forward discount IMPLIED by IRP theory.



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 01:30PM by forzajuve.

Windjam

^ many thanks.



Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 01:31PM by Oal29.

thommo77

This was helpful...can anyone explain if below is a correct way to think about things? Its that last term that always throws me off...is it ignored because its usually small?


8.5% - 2.9% + (8.5%*-2.9%) = 5.59% or 5.6%

dyga

june2009 Wrote:
-------------------------------------------------------
> This was helpful...can anyone explain if below is
> a correct way to think about things? Its that
> last term that always throws me off...is it
> ignored because its usually small?
>
>
> 8.5% - 2.9% + (8.5%*-2.9%) = 5.59% or 5.6%

It's only ignored in international bond convention.