Roflnadal

So the currency movement should be applied to the principal (that's why he puts the "1") AND to the actual returns in local currency.

Roflnadal

jdane416 Wrote:
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> I would love to hear another opinion on this. As
> far I as I know, my formula is the way to compute
> (straight out of CFAI and one of the Mocks).
>
> That being said, I could be completely wrong...

Your 2% is based on forward rates, not spot return.

If you are locking in a 2% forward discount, your formula is correct.

That is not what the question is asking.

The fund's return for the period is 8%. The euro depreciates 2% vs your domestic currency. Div yield for the period is 1%.

I have hedged principal for translation risk, but left returns unhedged as I can't hedge returns ex-ante for currency.

This is straight out of risk management, calculating returns. Your formula is out of the bond chapter and only applicable to fixed assets and assets that you know the discount beforehand.



Edited 1 time(s). Last edit at Thursday, June 2, 2011 at 11:03AM by Paraguay.

Roflnadal

LobsterBoy Wrote:
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> Here is perhaps an easier way to do it:
> Rd= Domestic return
> Rlc = Local currency return = Capital Gain + Yield
> Income = .08 +.01 = .09
> S = currency spot appreciation = -0.02
>
> Rd = Rlc + S + Rlc * S
> Rd = .09 + -0.02 + (.09)(-0.02)
> Rd = .0682

Obviously this is unhedged return. We got a bit off track here though.