interest rate differential

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pwyborn
Posts: 25
Joined: Sat Oct 29, 2011 12:42 pm

interest rate differential

Postby pwyborn » Sun Sep 30, 2012 3:55 pm

Hi Carol,

For currency hedging with futures, why is it that the return on the hedged portfolio will differ over time from the return on the portfolio measured in foreign currency by the interest rate differential?

Thanks!

Pete
l

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: interest rate differential

Postby coalexander » Sun Sep 30, 2012 6:04 pm

See equation (III.2.3) and its derivation on page 91. The interest rate differential is the difference between the spot and forward exchanges rates, so if you hedge a forex spot position with futures you expect that the return on the hedged portfolio will differ from the return on the portfolio by the interest rate differential. Cheers, Carol


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