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April 2006, Q5

1

1495_sc

Ton up Member
Hi,

Can someone please share a detailed solution of this question? I could not get to the answer beyond calculating MWRR for each country. How to effectively use the currency rates in the question?

Thanks in advance!
 
Hi,

Unfortunately I don't have a detailed solution for this and I believe that the ASET written for this (which hasn't been available for a number of years) took a different approach to that of the examiners. I think you've probably done quite well in just getting the MWRRs as this was a very difficult question.

In terms of currency returns it's calculated as (Currency rate at start year / currency return at end year) - 1. To convince yourself of this you can think of 1 unit invested at the start of the year that earns currency returns only. E.g. for £1 invested in US dollars we would receive 1.9 dollars at the start of the year. At the end of the year we could convert that 1.9 dollars back into pounds and would receive 1.9/1.75 = 1.08571 so currency returns are 8.571%. The effect on performance then depend on whether we are over/under weight in those currencies. From a currency perspective some outperformance would be generated from being over-exposed to the US as the currency has appreciated but in this case we have held the benchmark weighting.

These currency returns can be applied to the benchmark returns as well, essentially putting everything in £ terms.

Another thing to note:

The Examiners assumed that the indices were total return indices, and hence the index yield was not used in the calculations.

Sorry that I can't be more helpful than this.
Joe
 
Thank you so much Joe. Will try solving again with your input but as it was questioned only once in 15 years, I hope this isn't repeated because solving this in exam seems challenging.


Joe Hook said:
Hi,

Unfortunately I don't have a detailed solution for this and I believe that the ASET written for this (which hasn't been available for a number of years) took a different approach to that of the examiners. I think you've probably done quite well in just getting the MWRRs as this was a very difficult question.

In terms of currency returns it's calculated as (Currency rate at start year / currency return at end year) - 1. To convince yourself of this you can think of 1 unit invested at the start of the year that earns currency returns only. E.g. for £1 invested in US dollars we would receive 1.9 dollars at the start of the year. At the end of the year we could convert that 1.9 dollars back into pounds and would receive 1.9/1.75 = 1.08571 so currency returns are 8.571%. The effect on performance then depend on whether we are over/under weight in those currencies. From a currency perspective some outperformance would be generated from being over-exposed to the US as the currency has appreciated but in this case we have held the benchmark weighting.

These currency returns can be applied to the benchmark returns as well, essentially putting everything in £ terms.

Another thing to note:

The Examiners assumed that the indices were total return indices, and hence the index yield was not used in the calculations.

Sorry that I can't be more helpful than this.
Joe
Click to expand...
Joe Hook said:
Hi,

Unfortunately I don't have a detailed solution for this and I believe that the ASET written for this (which hasn't been available for a number of years) took a different approach to that of the examiners. I think you've probably done quite well in just getting the MWRRs as this was a very difficult question.

In terms of currency returns it's calculated as (Currency rate at start year / currency return at end year) - 1. To convince yourself of this you can think of 1 unit invested at the start of the year that earns currency returns only. E.g. for £1 invested in US dollars we would receive 1.9 dollars at the start of the year. At the end of the year we could convert that 1.9 dollars back into pounds and would receive 1.9/1.75 = 1.08571 so currency returns are 8.571%. The effect on performance then depend on whether we are over/under weight in those currencies. From a currency perspective some outperformance would be generated from being over-exposed to the US as the currency has appreciated but in this case we have held the benchmark weighting.

These currency returns can be applied to the benchmark returns as well, essentially putting everything in £ terms.

Another thing to note:

The Examiners assumed that the indices were total return indices, and hence the index yield was not used in the calculations.

Sorry that I can't be more helpful than this.
Joe
Click to expand...
 
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