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# CFAI practice questions: Portfolio Trading-Perf Eval-GIPS - Chung

Posts: 7 Associate
6-6 hedged return=Return in foreign currency+ forward discount=8.5-3.16=5.34
The given answer used spot and forward price to calculate the forward discount(-3.16%). However, the item set also provided foreign and domestic interest rate. The forward discount(-3.3%) calculated by IRP is different with previous method.
Hedged return can also be calculated using domestic risk-free interest rate(1.3%) plus local risk premium (8.5%-4.6%), it will give an answer with 5.2%.
Which method should be used here? And why?
Tagged:

• Posts: 1,999 Sr Partner
Hey @Ying, would you clarify where this question came from in the CFAI syllabus? It'd help the community to help you out as not all of us has the reference books anymore (like good ol' me).

Normally it's best to paste the whole question here, or as an image, which would help the discussion
• Posts: 7 Associate
Hi @Sophie, thank you for your respond. I was being silly. What does 6-6 mean really? lol. This is a question from practice tests offered by CFAI, it's under the last session, Portfolio Trading-Perf Eval-GIPS - Chung. Do you still be able to see the test?
• Posts: 7 Associate
Here is the question.

The expected (local currency) return on the bonds is 8.50%, and the 1-year risk-free yields are 1.3% in the United States and 4.6% in Australia. The spot exchange rate is USD0.6900/AUD1 and the one-year forward rate is USD0.6682/AUD1.

Given the exchange rate and interest rate data provided, if the Australian currency risk is fully hedged, the bond's expected return will be closest to:

5.20%.
5.34%.
3.90%.

Thank you!
• @ying @Sophie‌

Hedged:
RDC = RLC + (id -if)
= 8.5% + (1.3%-4.6%)
= 5.2% (A)
• edited June 2014
• Posts: 7 Associate
Thanks Alta12, but that did't answer my question. The answer given is 5.34%, not 5.2 %. Please see my first message. My question is between those two approach, why we should use RLC+f discount. and f discount calculated with exchange rates is different from IRP.
• There must be something else mentioned in the question. This question is not in mock A, B or C. Where are you getting it from?
• @vincentt which mock is this?
• LondonPosts: 749 Sr Portfolio Manager
@alta12 not in any mocks, go to candidate resources and click on the "Portfolio trading, GIPS, etc etc", you'll be taken to this sample test.