O'Reilly logo

Handbook of Exchange Rates by Lucio Sarno, Ian Marsh, Jessica James

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

18.3 Return and Volatility Impact of Currency Hedging

18.3.1 Theoretical Background

For better understanding of currency hedging and its impact on volatility, we outline some basic formulas of hedged and unhedged returns. The value of the unhedged asset in the investor's base currency images is given by

18.1 18.1

where images is the value of the foreign asset at time t in foreign currency and St is the exchange rate at time t, measured in units of investor's home currency per one unit of foreign currency.

The log return of the unhedged asset is the sum of the asset log return in local currency and the log return on holding foreign currency:

18.2 18.2

where images is the log of the value of the unhedged foreign asset exposure in domestic currency at time t, images is the log of the foreign asset value in foreign currency at time t, and st is the log of the exchange rate, measured in units of investor's home currency per unit ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required