标题: currency hedged foreign bond return [打印本页] 作者: ASSet_MANagemen 时间: 2011-7-13 14:39 标题: currency hedged foreign bond return
-The expected local return on the bond is 8.5%.
-The 1 year risk free 1.3% for US.
-The 1 year risk free 4.6% for Australia.
-spot exchange 0.69 USD/AUD
-one year forward 0.67 USD/AUD
What is the expected return on the bond when Australian currency is fully hedged.
The answer 5.2% is wrong.
Reason for it?
thx作者: Chuckrox 时间: 2011-7-13 14:39
hedged return = (0.67/0.69 x 1.085) - 1
as
0.67 > 0.69 x 1.013/1.046 (but you hedge at 0.67)作者: strikethree 时间: 2011-7-13 14:39
The spot and forward rate weren't in interest rate parity.作者: wake2000 时间: 2011-7-13 14:39
currency return .67/.69-1=-2.9%
local return=8.5%
8.5%-2.9%=5.6%
Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 09:34AM by jmac01.作者: Unforseen 时间: 2011-7-13 14:39
but i really think the answer should be 5.36%
(100*1.085*.67)/(100*.69)作者: former 时间: 2011-7-13 14:39
IRP does not hold and IRP is not even mentioned. I think this is the reason.作者: bodhisattva 时间: 2011-7-13 14:40
alta168 Wrote:
-------------------------------------------------------
> Paraguay Wrote:
> --------------------------------------------------
> -----
> > The spot and forward rate weren't in interest
> rate
> > parity.
>
> Why ? Usually we assume IRP hold if I/R of DC & FC
> are given, right ?
Lots of discussion about this question. I would have assumed the same, however if given the forward and spot rates I guess you should use them to calculate return.作者: Windjammer 时间: 2011-7-13 14:40
Is this a EOC question? If do, what #?作者: bpdulog 时间: 2011-7-13 14:40
Answer is 5.6%作者: liangfeng 时间: 2011-7-13 14:40
Paraguay Wrote:
-------------------------------------------------------
> The spot and forward rate weren't in interest rate
> parity.
this is very important ......................see if you use the IRP approxiamtion you are implicitly assuming the forwards and spot rates are in parity ...............as evidenced by this CFAI q thats a wrong assumption. 5.2 % was there as well as 5.6% ...............5.6% is what you would earn if you used forwards , 5.2 is what you would earn using spot.................
More interesting is the case what if you would ern more in the spot market than in the forward market ( opposited of the case above) would you avoid the forward and invest in spot?作者: Roflnadal 时间: 2011-7-13 14:40
I didn't see an ending spot rate so I did this:
S1 = .69(1.03/1046) = .6794
Change in S = (.6794-.69)/.69 = -.0153
Rd = Rlc + s(1+Rlc) = .085 - .0153(1.085) = .0684
Rf = (.67-.69)/.69 = -.029
Rh = Rd - h(Rf) = .0684 - 1(-.029) = .0974
NO EXCUSES作者: Unforseen 时间: 2011-7-13 14:40
pfcfaataf Wrote:
-------------------------------------------------------
> hedged return = (0.67/0.69 x 1.085) - 1
>
> as
>
> 0.67 > 0.69 x 1.013/1.046 (but you hedge at 0.67)
this is incorrect because this solution assumes you hedge the expected return too, but based on the book (as Paraguay said: "Foreign bond chapter says use addition rather than multiplicative. more ambiguity.") the correct solution is:
Posted by: jmac01 (IP Logged)
Date: June 1, 2011 03:31PM
currency return .67/.69-1=-2.9%
local return=8.5%
8.5%-2.9%=5.6%作者: Windjam 时间: 2011-7-13 14:40
What page is this on?
NO EXCUSES作者: Analyze_This 时间: 2011-7-13 14:40
132 - 135 V4作者: skycfa 时间: 2011-7-13 14:40
Thanks, why are they even going into this formula when they have other formulas we have to remember for this section that aren't even consistent?
This reading is very convoluted.
NO EXCUSES作者: Windjammer 时间: 2011-7-13 14:41
bpdulog Wrote:
-------------------------------------------------------
> Thanks, why are they even going into this formula
> when they have other formulas we have to remember
> for this section that aren't even consistent?
>
> This reading is very convoluted.
I think you mean this curriculum is convoluted. It seems like they had a lot of writers who all wanted to put something in and decided it would be easier to contradict each other than to write together.
I just pray the curriculum is about passing people that know it rather than English and question trickery.
Trickery does not prove who knows things, just who is methodical and not the conservative investor who researches kind.
Edited 2 time(s). Last edit at Wednesday, June 1, 2011 at 01:13PM by Paraguay.作者: Darien 时间: 2011-7-13 14:41
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.作者: Windjam 时间: 2011-7-13 14:41
^ many thanks.
Edited 1 time(s). Last edit at Wednesday, June 1, 2011 at 01:31PM by Oal29.作者: thommo77 时间: 2011-7-13 14:41
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?
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.
