Hi guys,
I was wondering if someone could help me clarify if my maths is correct in calculating hedge costs for foreign bonds.
Scenario: I want to invest £100,000 into US 1yr Treasury Bills. I want to hedge my FX risk using a 1yr Forward.
GBP/USD spot rate = 1.4131
GBP/USD 1yr FWD = +226 = 1.4357
US 1yr TBills Yield = 2.018%
Step 1: Swap £100,000 into $141,310
Step 2: Invest $141,310 into 1yr Bills, ROI = $2,851.64, Total = $144,161.64
Step 3: Swap your USD into GBP @ FWD rate of 1.4357 = £100,412.09
Is this correct? I feel like I might be making an error here in terms of how the forward is calculated at the future date (1yr on) when converting your new USD amount back to GBP.
ODS-UK, sorry there are no responses yet. Maybe one of these topics can point you in the right direction:
Calling relevant pros to the rescue! Bobbandit28 UnfinishedSentenc wmahoney17
Fingers crossed that one of those helps you.
Your math is correct
Thanks for the response and confirmation Rey.
I have a follow up question if you don't mind...
In the above image, you'll see that I have UK treasury yields and below calculations for US and SAfrica as well as Mexico and Russia - but converting to USD first due to lack of data for GBP/MXN or GBP/RUB forwards.
Is the math again correct? In particular is concern for the MXN and RUB treasuries which add a layer of complexity. Hopefully it is right and will help others too.
Many thanks!
Of course - On this question, right off the bat you are mistaking how the yield works on notes.
The 1M yield 0.319% does NOT mean you are making 0.319% of the notional contract at the maturity in 1 month. Your formula implies you are making Notional*yield = interest. aka your formula is 300k x 0.319 = 957. This is not the case.
Return = (Notional x yield)(t/12). So your return on the 1M GBP note is (t=1)... return = (300k x 0.319%)(1/12) = 79.75 GBP
And so on for other tenors... return 3m = (300k x 0.420%)*(3/12) etc....
This is throwing off the numbers in all your formulas, and ultimately skewing your data. Otherwise, as for your currency translations. They look good at a glance, but full disclosure I'm not going through this with a fine-tooth comb.
Hi Rey,
Thanks for your reply. I believe the information I used was using the annualised yield on a 1m TBILL, so annualised it equates to 0.319%. Here is a screengrab from Investing.com where I got the information:
If we consider the data is annualised, is the math then correct? I understand it is odd I used £300,000 but it's the figure that would theoretically be invested hence it's appearance. Many thanks.
those rates are all annualized...just for different terms
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