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but i really think the answer should be 5.36%

(100*1.085*.67)/(100*.69)

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pfcfaataf Wrote:
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> 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%