They calculate hedged return as the local currency return +forward premium (or less the discount). I agree that this works. However, isn’t an alternative method shown below:
domestic RFR + (Return in local curr - Foreign RFR)
This would be 1.3 + (8.5 - 4.6) = 5.2, which a listed, but incorrect, answer.
The first method though gives us 5.34, which is the correct answer. Why does the second method not work? And how are we to know which method to use on the exam?
domestic RFR + (Return in local curr - Foreign RFR)
This would be 1.3 + (8.5 - 4.6) = 5.2, which a listed, but incorrect, answer.
The first method though gives us 5.34, which is the correct answer. Why does the second method not work? And how are we to know which method to use on the exam?