Confused About Similar Foreign Asset Return Formulas

CFA Level III Derivatives
#1

So we have:

  1. Domestic Return=Return on Foreign Asset +Return on FX+(Return Foreign)*(Return FX)

and

  1. Domestic Return on Foreign Bond=Return in Local Currency+Currency Return

where

Currency Return=r(d)-r(f)=Forward discount/premium.

What is the difference between these two and when do I use one and when do I use the other?

#2

Where do you get +(Return Foreign)*(Return FX) in the first formula? Don’t recollect seeing this anywhere. The first part makes sense though: Domestic Return=Return on Foreign Asset +Return on FX.

#3

Sorry. It is:

R(DC)=[(1+R(FC))*(1+(R(FX))]-1 which simplifies to R(FC)+R(FX)+(R(FC)*R(FX))

#4

I’m confused too. When to use addition- R(L) + R FX and when to use R(L) + R(FX) + R(FL*FX) ???

#5

As this term - + R(FL*FX) - is normally really small, you can use R(L) + R(FX) as a reasonable approximation. However, just remember R(DC)=[(1+R(FC))*(1+(R(FX))]-1 and forget this other discussion.

#6

you are taking me back to high school when I used to solve quadratic equations like this. Don’t complicate the formula man. The last part is not needed if you solve it within the brackets.

#7

You know, sometimes I think that reading analyst forum just confuses me more. This is a perfect example. In almost every question I’ve seen, adding the two is simple. But to be more precise, you could multiply.

Then the OP comes in with some rearranged formula that I’ve never seen before making me think I’ve missed a whole section! I haven’t, it’s just a rearranged formula.

I think I’m gonna stop reading AF.

#8

cheeky

#9

This forum can definitely do that, I think its a good thing though and I definitely attribute part of my success on the past 2 exams to reading AF. Also, its a great way to think about some of the material when you cant otherwise be studying, like at work.