Hedging various risks only, difference, domestic, Foreign

LBriscoe

I always seem to screw this up, so want to see if I have it correct now...

When you hedge only the market exposure, so price risk, you return the Foreign Risk Free Rate?

When you also hedge Currecy risk you return the domestic risk free rate?

If you only hedge Currency risk, do you return domestic risk free rate plus the difference between bond return and foreign risk free rate?

Windjammer

the first two are right, at least, not sure about the third (have not had coffee yet).

Analyze_This

If as "market" you mean foreign bond market, then the third is right and that finally looks as = foreign bonds spread + Rf(domestic).

If that was equity market, then you get = equity return + Rf(domestic) - Rf(foreign)

Darien

This concept confuses me again... I agree with 2 and 3. However I don't get how you get local risk free rate when you hedge market risk only. Isn't it local risk free + currency exposure?

dyga

SerGrey Wrote:
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> If that was equity market, then you get = equity
> return + Rf(domestic) - Rf(foreign)

I think you mean foreign equity market, then why you get
= foreign equity return + Rf(domestic) - Rf(foreign) ?