Cross Hedge - Multiply currency risk by risk-free rate

TheDooner64

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
This question is in reference to CFAI book 5 page 270, example 8
The solution to the problem says to multiple the currency risk (i.e. standard deviation of the FX portion) by the risk-free rate in order to calculate the expected risk for the domestic-currency return. The asset risk is 0 in this case since it’s about treasury bills.
Can anyone explain why this calculation requires the extra step of multiplying the currency risk by the risk-free rate? I have not seen this step in any other instances of standard deviation calculations.
Thanks
 
Back
Top