Question was,
for an account that actively manages currency risk, what is the hedged currency risk?
i assumed euro is the base currency here…couldn’t get it right. Best way to solve this?
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So, this question I checked in Schweser. Here’s how I approached to solve it by myself.
First thing, EUR is the base currency here. But this question is not the usual question where we calculate Rfc & Rfx and we chain it together because here we have been given ending value of the portfolio and not its just return.
Here’s what I did —
Portfolio return = (320,000/300,000)-1 = 6.66%
Now spot currency has appreciated so portfolio must have gained because of that so,
currency return = (1.2/1.1) – 1 = 9.09%
Now, we hedged in futures ..i.e. we sold eur so futures mein loss hua hai
so, loss in futures = (1.15/1.23)-1 = -6.5%
Chaining them togther, we get return of approximately 9%.
Note : other options are easily eliminated.
chaining them together means? what was the exact calculation for arriving at 9% as the answer? I thought 6.67 would be the answer since currency effect has been hedged, so only Rfx = Rdc
chaining ..factor * factor * factor
or just adding the three returns I calculated