The hedged benchmark calculates index returns based on the assumption that the currency component of the source index return was hedged at the beginning of the period. The hedged returns are calculated with reference to the local return of the securities and segments of the source index and the base currency of the source.
The hedged custom index returns are only calculated at the total index level.
The calculation of the Hedged benchmarks supports only monthly vendor index/source data. Specifically, data in the Perform..perf_summary table where the PERF_FREQ_CODE = M.
Calculate Returns
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:
(End Exchange Rate / Begin Exchange Rate) – 1
- Calculate the Converted Return Unhedged:
(1 + Local Return) * (1 + Exchange Rate Return) – 1
- Calculate the Currency Return on Unhedged Local Total Return:
Exchange Rate Return * (1 + Local Return)
- Calculate Forward Return:
(1 Month Forward Rate / Begin Exchange Rate) – 1
- Calculate Hedge Return:
Hedge Ratio * (Forward Return – Exchange Rate Return)
- Calculate the Converted Return Hedged:
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 |
Hedged Conversion Benchmark Example
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.
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