in the calculation of expected return, they have added the currency %. Can someone please confirm if euro appreciates against dollar means euro/dollar?
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USD is the foreign asset and EUR is the domestic asset, EUR is appreciating which means the EUR/USD will go down. (USD will depreciate and EUR will appreciate)
but they are adding the currency component which means dollar has appreciated
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E(R) ≈ % Rolldown return + E (% Δ Price due to investor’s view of benchmark yield) + E
(% Δ Price due to investor’s view of currency value changes)
Rolldown return = (PV1 – PV0) / PV0
(98.75 – 97.00) / 97.00 = 1.80%
E (% Δ Price due to investor’s view of benchmark yield) = (– Duration × Yield change) +
[0.5 × convexity × (Yield change)2]
(–4.50 × –0.50%) + [0.5 × 17.0 × (–0.50%)2] = 2.27%
Bullet Portfolio = 4.83% = 1.80% + 2.27% + 0.75%
Rolldown return = (PV1 – PV0) / PV0
(99.75 – 97.75) / 97.75 = 2.05%
E (% Δ Price due to investor’s view of benchmark yield) = (– Duration × Yield change) +
[0.5 × convexity × (Yield change)2]
(–4.45 × –0.50%) + [0.5 × 40.0 × (–0.50%)2] = 2.28%
Barbell Portfolio = 5.07% = 2.05% + 2.28% + 0.75%
May I know what is the source of this snippet?