Analyze_This

jdane416 Wrote:
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> Wow. Thanks for the clarification. I need to go
> re-read that chapter now.

The bond chapter assumes that returns are equal to Local Return + FC return. Whereas risk management of currencies and the futures section realize currency return is multiplicative.

The reason this assumption takes place is if I buy a 1year coupon TSY, I know all of my cash flows before hand. T1 coupon + T2 coupon and principal. I can hedge via the PV the entire amount rather than any variable amount.

With an equity, I would only hedge T0 value as I am not sure what the value is T + 2, which could leave me overhedged or underhedged come T + 2.



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