...
The hedged returns calculated for the custom index are based on a rolling 1-month hedge. You set the value to be hedged at the beginning of the month. The local returns provided by the index vendor are adjusted by a hedge return, where the hedge return equals the forward return for the period less the currency return for the period.
Begin and end dates are determined based on the entity build effective date. The begin date is found using the Julian Calendar. For example, as described in the following table, the hedged benchmark requires exchange rates and one-month forward rates to be loaded on the begin and end dates.
Entity Build Date | Begin Date | End Date |
|---|---|---|
1/31/2003 | 12/31/2002 | 1/31/2003 |
2/28/2003 | 1/31/2003 | 2/28/2003 |
3/31/2003 | 2/28/2003 | 3/31/2003 |
4/30/2003 | 3/31/2003 | 4/30/2003 |
5/31/2003 | 4/30/2003 | 5/31/2003 |
6/30/2003 | 5/31/2003 | 6/30/2003 |
7/31/2003 | 6/30/2003 | 7/31/2003 |
8/31/2003 | 7/31/2003 | 8/31/2003 |
9/30/2003 | 8/31/2003 | 9/30/2003 |
10/31/2003 | 9/30/2003 | 10/31/2003 |
11/30/2003 | 10/31/2003 | 11/30/2003 |
12/31/2003 | 11/30/2003 | 12/31/2003 |
Complete the following:
- Calculate the Exchange Rate Return:
...
Local Return + Currency return on Unhedged Local Total Return + Hedge Return
Data storage for the Hedged benchmark is described in the following table.
Data | Stored | Notes |
|---|---|---|
Source Index |
Base currency | RULES..ENTITY.BASE_CURRENCY | For the source entity, entered in the Entity Details tab |
Total Local return | PERFORM..PERF_SEC_RETURNS | Returns are in percent format |
Target Index |
Base currency | RULES..ENTITY.BASE_CURRENCY | For the target entity, entered in the Entity Details tab |
Hedge ratio | RULES..CUSTOM_INDEX_ATTRIBUTES.WEIGHT | New element required for this index |
Exchange Rates |
Spot rate at begin of period | SECURITY..FX_RATES.SPOT_RATE |
Spot rate at end of period | SECURITY..FX_RATES.SPOT_RATE |
Forward rate at begin of period | SECURITY..FX_RATES.FOR_1MNTH_RATE | New element for this type of index |
| Anchor | ||||
|---|---|---|---|---|
|
| Anchor | ||||
|---|---|---|---|---|
|
For the example purposes, assume the following hedged example:
Source Index (USD BASE_CURRENCY) – Percent to Hedge: 100 Target Custom Benchmark (INR BASE_CURRENCY)
The following table lists the data for the source index for the Hedged benchmark.
Perf Rollup Returns ID | Description | ABAL | Return |
|---|---|---|---|
1 | Total | 100.000000000000 | 2.337512614320 |
Resulting target data for the Hedged benchmark is listed in the following table.
Date | Rate | Desc | Data |
|---|---|---|---|
4/30/2000 | 43.6600 | exch rate - begin |
5/31/2000 | 44.2500 | exch rate - end |
4/30/2000 | 44.0000 | 1 month forward rate |
100.0000 | hedge ratio |
Decimal | Percent | Calculated As | |
Local return | 0.023375126143 | 2.337512614 | Input A |
1M forward rate exchange rate at begin date | 44.0000 |
Input B | |
Exchange rate begin | 43.6600 |
Input C | ||
Exchange rate end | 44.2500 |
Input D | |||
Exchange rate return | 0.013513514 | 1.351351351 | E =(D/C)-1 |
Converted return unhedged | 0.037204519740 | 3.720451974 | F =(1+A)*(1+E)-1 |
Currency return on unhedged local total return | 0.013829394 | 1.38293936 | G =E*(1+A) |
Forward return | 0.007787448 | 0.778744847 | H =(B/C)-1 |
Hedge ratio | 1.00 | 100 | I |
Hedge return | -0.005726065 | -0.572606505 | J = I * (H - E) |
Converted return hedged | 0.031478454692 | 3.147845469163 | K = A + G + J |
Weights are copied from the source index data.
...
You can create a custom benchmark with a type of Hedged. In this example, the custom benchmark hedges the Domestic Equity Large Cap index 100% to British Pounds.
To configure a hedged benchmark:
- Verify that the base currency value was updated for the source entity. See the following figure.
Anchor
To confirm this, find the source entity (the entity that currently exists in the PERFORM database that you convert to another currency). From any Eagle window, click the Eagle Navigator button to access the Eagle Navigator. Enter Entities in the Start Search text box. Click the Entities (Performance Center) link. You see a list of entities.
The base currency field is located in the Entity Details tab of the Editing Entity dialog box. Ensure that the proper base currency is populated for the As Of date of the entity build. For example, if you choose to use the currency conversion benchmark for data on 4/30/2004, then ensure that an effective date less than or equal to 4/30/2004 exists in the Entity Details tab with the proper base currency.
- Create the custom benchmark entity. In the Entity Info tab:
- Set the entity Type to Custom Benchmark.
- Enter the entity ID and name information for the custom benchmark.
...
- In the Entity Details tab:
- Populate the base currency field for the custom benchmark entity. See the previous figure.
This value is the target base currency. Ensure that the base currency exists on the correct asof date.
- Enter the Inception Date for the custom benchmark.
...
- In the Custom Index Attributes tab, define the following information. See the previous figure.
...
index
...
For additional information about the historical date options, see Set Up the Custom Index Attribute for Historical Date.When you edit the entity additional options become available. For details, see Delete Custom Index Attributes.
...
data
...
.
...
- In the Exchange Rate Source Rule field, select a current source rule to use for the exchange rates.
...
- Target Base Currency. Identifies the base currency to convert to. Displays the base currency you entered for the custom benchmark on the Entity Details tab.
- Source Base Currency. Identifies the base currency to convert from. Displays the base currency associated with the source entity selected on this tab.
If you do not indicate the currency, the fields display a value of Not Specified.
- In the Percent to Hedge field, enter the amount of the currency that is assumed to have been hedged.
This field defaults to a value of 100, but you can change it.
- Click the Finish button.
Additional tabs are available in the entity setup but they are not required for the custom benchmark setup.
The custom index attributes information is saved in the database in the rulesdbo.custom_index_attributes table.Anchor