Hedged vs. Unhedged return return

ASSet_MANagemen

What are the proper formulas for these. I don't seem to have universal formulas for these in my notes.

Thanks.

ll11

Hedging after the fact i.e. when euro devaluation has become apparent in the market , and the extent is being overestimated , would not be a good thing, since the hedge would be priced higher than you think it should be worth.

mik82

they relate to the forward premium or discount formulas and interest rate parity, basically if the forward markets imply some sort of discount or premium based on interest rate differentials, and you forecast a return different from this "market implied" change in spot, then you would either hedge or not based on what would be more profitable.

Ex: spot is eur/usd @ 1.4, euro interest rates are 5% and us is at 3%, so we know the euro forward should depreciate about 2% using interest rate parity. If you think the euro is only going to depreciate 1%, then the euro is underpriced by the market and you should buy the forward, or hedge.