Investment Theory_Week 6_Contextual

Forex Hedging

Currency Forward Rates

gbp.f = 1*(1.0175)
gbp.f

## [1] 1.0175

usd.f = 1.2133*(1.0250)
usd.f

## [1] 1.243632

forward = usd.f/gbp.f
forward

## [1] 1.222243

Portfolio Worth

initial = 500
port.worth = initial*1.2133*(1 + 0.07)
port.worth

## [1] 649.1155

Portfolio Value

port.val = port.worth/forward
port.val

## [1] 531.0854

Domestic Return

domestic.r = (port.val/initial - 1)*100
domestic.r

## [1] 6.217073

The International Fisher Effect

Left-Hand Equation

lh.fisher = (forward - 1.2133)/1.2133
lh.fisher

## [1] 0.007371007

Right-Hand Equation

rh.fisher = (0.0250 - 0.0175)/1.0175
rh.fisher

## [1] 0.007371007