Hello all, please see question below. The answer is A.
The EUR IG and EUR HY allocations are denominated in euros, and the euro is
expected to depreciate by 2% versus the US dollar over the next year.
32. What is the approximate unhedged excess return to the United States–based
credit manager for an international credit portfolio index equally weighted across
the four portfolio choices, assuming no change to spread duration and no changes to the expected loss occur?
A. –0.257%
B. –0.850%
C. 0.750%
I am confused with the explanation provided in the answer key.
“Recall that the United States–based investor must convert the euro return to
US dollars using RDC = (1 + RFC) (1 + RFX) – 1, so the USD IG and USD HY
positions comprising half the portfolio return an average 0.80%, while the EUR
IG and EUR HY positions return –1.314% in US dollar terms (= ((1 + ((0.65% +
0.75%)/2)) × 0.98) – 1), so –0.257% = ((0.80% – 1.314%)/2)”
How does (= ((1 + ((0.65% +
0.75%)/2)) × 0.98) – 1) = 1.314%? I am getting 0.686%. Please could someone help?