Hedged Benchmarks

Owned by Tom Fahey (Unlicensed)
Last updated: Oct 02, 2023 by Pamela Totas (Deactivated)
2 min read

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

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:

  1. Calculate the Exchange Rate Return:
    (End Exchange Rate / Begin Exchange Rate) – 1

  2. Calculate the Converted Return Unhedged:
    (1 + Local Return) * (1 + Exchange Rate Return) – 1

  3. Calculate the Currency Return on Unhedged Local Total Return:
    Exchange Rate Return * (1 + Local Return)

  4. Calculate Forward Return:
    (1 Month Forward Rate / Begin Exchange Rate) – 1

  5. Calculate Hedge Return:
    Hedge Ratio * (Forward Return – Exchange Rate Return)

  6. 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

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

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

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.