currency hedged foreign bond return return

ASSet_MANagemen

-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

Chuckrox

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)

strikethree

The spot and forward rate weren't in interest rate parity.

wake2000

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.

Unforseen

but i really think the answer should be 5.36%

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

former

I would've said that:

R(hedged) = R(local) + Rc(hedged) = 8.5 + (1.3 - 4.6) = 5.2%

ll11

jmac01 Wrote:
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> but i really think the answer should be 5.36%
>
> (100*1.085*.67)/(100*.69)

Foreign bond chapter says use addition rather than multiplicative. more ambiguity.

Analti_Calte

Paraguay Wrote:
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> 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 ?

nannan66

jinstudy, answer pls!

skycfa

IRP does not hold and IRP is not even mentioned. I think this is the reason.