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.

Complete the following:

1. Calculate the Exchange Rate Return:

(End Exchange Rate / Begin Exchange Rate) – 1

1. Calculate the Converted Return Unhedged:

(1 + Local Return) * (1 + Exchange Rate Return) – 1

1. Calculate the Currency Return on Unhedged Local Total Return:

Exchange Rate Return * (1 + Local Return)

1. Calculate Forward Return:

(1 Month Forward Rate / Begin Exchange Rate) – 1

1. Calculate Hedge Return:

Hedge Ratio * (Forward Return – Exchange Rate Return)

1. 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.

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.

Resulting target data for the Hedged benchmark is listed in the following table.

Weights are copied from the source index data.

Configure a Hedged Benchmark

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:

1. Verify that the base currency value was updated for the source entity. See the following figure.

Editing Entity – Entity Details Tab
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.

Currency Conversion Benchmark Entity Info Tab

1. 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.

See the previous figure for an example of the Entity Info tab.

Editing Entity – Entity Details Tab

1. 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.

This field is not required, but as a best practice, Eagle recommends entering an inception date that matches the effective date of the earliest definition (that is, the earliest date associated with data entered in the Custom Index Attribute tab) for the custom benchmark.

Editing Entity – Custom Index Attributes Tab

1. In the Custom Index Attributes tab, define the following information. See the previous figure.

• Effective Date. The effective date of the custom index attributes definition when you save it in the database. In the Select Historical Date section, select one of the following options to identify the date for the attributes you are defining:
• AsOf today
• Use earliest holding date
• Use this value <DATE>

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.

• Save History. Allows you to save an "as of" definition to the database. The Finish button serves the same purpose.
• Type. The type of custom benchmark you are creating. Use a value of Hedged.
• Source. Source under which the source entity data is stored in the PERFORM database.
• Source Dictionary. Source dictionary under which the entity data is stored in the PERFORM database.
• Entity. Source entity from the PERFORM database.
• Date Rule. Does not apply for this type of benchmark.

1. In the Exchange Rate Source Rule field, select a current source rule to use for the exchange rates.

The source rule you choose should contain sources for Foreign Exchange. As an example, see the following figure.

Edit Source Rule – Foreign Exchange Source Rule
Below the Exchange Rate Source Rule field, the Custom Index Attributes tab displays the following fields for information purposes.

• 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.

1. 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.

1. 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.