This approach is not widely used. It does, however, have the merit of fully expressing thecurrency risk and returns that an investor is running, and of spelling it out independently fromasset returns. But it has two important disadvantages:1. Because currency surprise is not an asset, returns generated under this regime cannot beindependently geometrically linked. Instead, they have to be attached to an asset (the ‘carrierasset’) to make geometric linking possible.2. The returns under this regime are precisely negatively correlated with the cash ﬂow arisingfrom hedging contracts. This is because this benchmark is always ‘long’ of currencies (asthe fund is), but any cash ﬂow arising from a hedge is ‘short’ of currencies. So for a 50%benchmark hedge ratio, the benchmark will show positive returns when the hedge cashﬂow is negative, and vice versa. While this is not a fundamental investment problem, in myexperience it gives investors a great deal of intuitive trouble.7.3.6 Currency overlay only methodologyThe currency overlay only methodology requires the separation of currency return from assetreturns, like the currency only methodology. However in this regime, we ignore the embeddedcurrency exposure, and report the benchmark returns purely as the ‘contribution from hedging’component. Alternatively or additionally, the currency overlay only methodology can generatea benchmark as a cash amount (rather than a percentage return), as in equation (7.6). Cashbenchmarks are unsuitable for mainstream benchmarking, but for active currency managementprogrammes, they may help the investor ‘keep a handle’ on what is going on.A worked example (with numbers) of the currency overlay only methodology is set out laterin Table 7.9, and the (very simple) maths is shown here:Benchmark returnt % = Contribution from hedgingt %
(7.16)
where ‘contribution from hedging’ is derived as shown in equation (7.5).7.3.7 Other methodologiesThere is a range of methodologies which, although sometimes used and intuitively simple,violate AIMR principles. I highlight two of these here, but will not consider them in detail
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further as they are not compatible with the AIMR compliance criterion required. One suchmethodology is the ‘cumulative cash’ approach. This approach takes the cash ﬂow generatedby hedging and accumulates it, earning interest and contributing to future performance. Thealgebra is as follows:Value of hedged portfolio = (Value of unhedged portfolio) + (Marked-to-marketvalue of hedge programme) + (Cum cash incl.cum interest)(7.17)The return for a period is then given as:Returnt % =
Value of hedged portfoliot−1Value of hedged portfoliot−1
(7.18)
The difﬁculty with this methodology lies in the fact that the returns for any period are dependenton the start date of the history. In addition, the cumulative cash can grow to such an extent thatthe cash and the interest on it comes to dominate the returns from hedging. It is also impossibleto analyse volatility on the basis of this return series, as the denominators of the unhedgedreturns and hedged returns are different.The other methodology to note here is a non-investible version of the currency overlay onlymethodology (see above). In this approach, hedged currency return is arrived at by addingthe contribution from hedging, equation (7.4), to the unhedged currency return. ‘Unhedgedcurrency return’ is deﬁned as the percentage change in the spot exchange rate over the period:Spot ratet−1(7.19)Unhedged currency returnt % =Spot ratet−1While this term is intuitively understandable, it is not investible, as there is no way in whichone can invest in spot rate change. Consequently, this methodology violates a core AIMRprinciple, and will not be considered further.7.3.8 A currency benchmark with or without asset returns?The dominant distinction to be drawn between the three methodologies outlined above relatesto the calculation of multi-period returns. In the case of asset plus currency overlay, this can bedone in the standard manner used for other asset classes – multiplicative ‘geometric’ linking.In the case of the other two, this is not appropriate, and other multi-period measures need tobe considered.The algebra of geometric linking of the asset plus currency overlay period returns is straightforward, and is set out in equation (7.3). It assumes that the contribution from hedging in eachperiod is reinvested in (or disinvested from) the underlying unhedged asset pool at the end of theperiod in which it arises. This impacts upon a range of other issues highlighted further below,but it is also the reason why it is inappropriate to apply geometric linking to the methodologieswithout asset returns included.Even though it is not possible to generate meaningful performance measures for such abenchmark independently of another return series, it is possible to generate meaningful relativeperformance measures such as tracking error and average periodic out- or underperformance.The measures which can be generated are further explored later in this chapter.
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7.3.9 Pricing/costsWhichever benchmark methodology is chosen, a decision will need to be taken as to whetherthe benchmark is to be ‘costed’ or not (i.e. whether it is to include bid/offer costs of trading).In the case of conventional equity instruments, standard convention now is to use mid-marketprices, resulting in ‘uncosted’ benchmarks. This is accepted as the standard convention forequities as no transactions are necessarily taking place at each period or subperiod end, and asthe benchmark needs to be unbiased with respect to buyers’ and sellers’ perspectives. This is notthe case in currency hedging. The forward currency contracts which are the basic instrumentof currency hedging are ﬁxed-term instruments, and require to be rolled over at maturity tomaintain a hedged position/benchmark. These transactions cannot be executed mid-price, andtherefore for the index to be investable it should be priced and valued at the appropriate sideof the market relating to the hedge.However, all published hedged indices use mid-prices for their benchmark calculations.While these are uninvestable, nevertheless they are an objective measure, and therefore wehave no objection if a client chooses this convention, although this benchmark will consistentlyoverstate achievable returns.7.3.10 Prices, not interest ratesCertain published methodologies4 suggest that currency benchmark calculations be based onspot currency moves plus interest rate differentials, rather than on currency forward prices asactually available in the markets and as applicable in practice to overlay portfolios. There aretwo types of interest rate methodology, one based purely on interest rate differentials, and onebased on notional lending and borrowing. Let’s take them in turn.7.3.10.1 Interest rate differentialsIn the earlier days of currency overlay, one of the most common benchmark methodologieswas as follows:Benchmark returnt % = Asset returnt % in local currency + Interest rate differentialt−1 %(7.20)This is obviously designed to produce an ‘asset plus overlay’ benchmark return. How does itcompare with our calculations of the same benchmark in equations (7.1)–(7.10)? Omitting forbrevity the detailed algebra (the mathematically-minded reader might like to do this independently), equations (7.2) and (7.20) produce different results – and only the returns in equation(7.2) are achievable. The difference between equations (7.2) and (7.20) [that is (7.2)–(7.20)]is (for the EUR example above):Errort % =
(Spot ratet − Spot ratet−1 ) (EUR portfolio valuet − EUR portfolio valuet−1 )×Spot ratet−1EUR portfolio valuet−1(7.21)
Or, in words: the error from equation (7.20) is the product of the percentage change in the spotrate and the percentage change in the underlying EUR portfolio value (i.e. local asset return).4Notably Karnosky and Singer, ‘Global Asset Management and Performance Attribution’, published by the Research Foundationof The Institute of Chartered Financial Analysts, February 1994.
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If the spot rate moves up by 1%, and the asset in foreign currency terms moves up by 3%, theerror is 1% × 3% = 0.03%, or 3 bp.7.3.10.2 Notional borrowing and lendingThe basic principle of this method of constructing a benchmark is that it is possible to eliminatecurrency risk by borrowing money in the foreign currency (in which the investor has equityinvestments), converting the proceeds to the home currency, and on-lending the proceeds. Thetwo legs of the transaction attract interest – payable in the foreign currency and receivablein the domestic currency. The net effect is that the investor pays or receives an interest ratedifferential, and has to revalue his debt each period, which acts as a hedge to the revaluationof his (equity) assets.A correctly constructed interest-rate-based hedge will be different from the conventionalforward-contract-based benchmark. With one modiﬁcation it can be identical as long as theforward rate conforms exactly to the interest rate arbitrage or (which is the same thing) the sameinterest rates are used for the forward rate pricing and the lending and borrowing calculations.This modiﬁcation is that the forward hedge has to be for (1 + (foreign interest rate × yearfraction)) times the foreign asset value (or, by analogy, the foreign debt has to be [1/(1 +(foreign interest rate × year fraction))] times the foreign asset value). I will let the reader workthrough the maths if he wishes to prove that this is the case.This methodology is perfectly acceptable from a mathematical perspective, but I wouldquestion why anyone would want to use it. Forward rates are expressed in FX terms, andvaluations are made by managers and custodians on the basis of forward rate calculations.Interest rates are neither independently collected for the FX market, nor are money market rates (exactly) the same as the implied interest rates from FX forward rates. Perhapsmost importantly, no single institutional portfolio investor that I have ever come across hashedged their foreign portfolio by borrowing the foreign currency, and re-depositing it in thehome currency. That has been the preserve of corporations, individuals, and the odd hedgefund.The 1998 AIMR benchmarks paper (Appendix 3) recommends forwards-based benchmarks – although it too recognises that interest-rate-based methodologies are valid if properlyused.7.3.11 RebalancingRebalancing frequency in the benchmark can only be equal to a fund’s benchmark reporting period. This is because different frequency rebalancing would create a path- or history-dependentbenchmark – breaching the principle of transparency and replicability.The choice of rebalancing frequency will be inﬂuenced by a variety of factors, of which thetwo most important are:
r Regulation relating to permissible foreign exchange exposures;r Cost (as each benchmark rebalancing will incur costs involved with the bid/offer on thecontracts inherent in the benchmark).Benchmarks cannot include rebalancing buffers: i.e. benchmark rebalancing is triggered bythe passage of a pre-set amount of time, and is not triggered by investment or currency
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exposure-related factors. This is because any trigger related to investment matters will result in the benchmark performance being path-dependent.The overwhelming frequency of rebalancing for published benchmarks is monthly.7.3.12 Original contract maturityThe maturity of the benchmark is an important decision. We have called it ‘original contractmaturity’, because while forward contracts have a maturity date that progressively approacheswith the passage of time, nevertheless at initiation they have an original maturity, and thisdeﬁnes them.Where the original maturity of the benchmark contracts is equal to the reporting and rebalancing frequency (all monthly in the case of most hedged indices published by externalproviders), there is zero MMV included in the rebalancing process5 (almost zero, and not exactly zero, because of roll-over costs). This has one signiﬁcant advantage: it avoids a potentialsource of tracking error between the reported performance of the benchmark (and of the actualportfolio), and the cumulative value of the actual portfolio.This source of tracking error arises because the algebra of geometric linking assumes thatcash actually ﬂows at the end of each period in the amount of the hedges’ value at that time,and that it is reinvested in or disinvested from the underlying (unhedged) assets at the closingasset prices. The next day the new denominator relating the new period is the MMV of theunhedged assets (including any assets assumed to have been acquired or sold as a result ofthe previous day’s ‘cash ﬂow’). However, if the value of the hedges at the end of the previousperiod does not actually ﬂow as cash (as it would not if the contracts have not yet matured),then this portion of the hedge return will still be MMV or ‘notional’ cash, and will on theface of it not be capable of being reinvested in the underlying hedged assets. This will create atracking error between the cumulative returns calculated from both the benchmark and actualoverlay on the one hand, and the actual cumulative asset value observed in the fund on theother.7.3.13 Constant maturity benchmarksThis is a special case of the maturity decision. If we take as an example a constant maturity 3-month benchmark, this could be constructed, if the reporting frequency was daily,by daily closing out the 3-month original maturity contract one day after it is initiated, andre-establishing a new contract with an original maturity of 3 months. The ‘closing out’ at amaturity of 3 months less a day would require interpolation of 2- and 3-months forward pricingdata.The ‘sawtooth’ pattern of maturity can be no ﬁner that the reporting frequency. So if thereporting frequency is daily, then the variation in maturity can be limited to one day. However,if the reporting frequency is monthly, then the variation in the maturity would be a minimumof one month.A constant maturity benchmark has a very high transaction turnover – in the above example26 000% p.a. The costs of this high turnover would not appear in a benchmark if it wascalculated at mid-prices, but would make close tracking with an actual portfolio expensive.5Only exactly zero if the benchmark is costless. If it is costed, then the newly rolled contract will have to be valued, and this willbe negative because of the bid/offer spreads.
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7.3.14 DiscountingRelated to the original contract maturity issue discussed above is the question of whether ornot to use discounting in the MMV of unmatured hedge contracts6 . In situations where thereporting frequency and hedge contract maturity are the same, MMV is immaterial to thebenchmark calculation as MMV will be nil at each period end (and the cash ﬂow is likely toarise at or near the reporting date). In situations where there is a mismatch, by contrast, MMVwill be much more important, and will grow in importance with the length of the mismatch.The non-discounted approach is usually acceptable on the basis that the expected long-termeffect of discounting on returns is zero, and that discounting would add very signiﬁcantlyto the algebraic complexity (and hence opacity) of the benchmark calculation. However, inthe case where the asset plus currency overlay methodology is being applied and there is areporting/original contract maturity mismatch, discounting will have a greater and longer-termimpact on benchmark performance, and may even be necessary to achieve investibility (becausemargining is normally done at discounted MMV – especially if it is two-way).Either way, each fund will need to decide whether or not discounting is to be applied in theirbenchmark calculations. Obviously, whatever is decided in relation to the benchmark shouldbe reﬂected in the management of the MMV of contracts actually traded. Only one majorindex provider – JP Morgan – discounts the valuations of forward contracts in hedged indexcalculations.7.3.15 Benchmark hedge ratio – strategic considerationsA key benchmark decision is the BHR. Typically, a hedge ratio is speciﬁed as the percentageof the value of international assets to be hedged, but this is not a universal or necessary wayof specifying it. It would be equally possible (although rare) to specify, for example, thatthe benchmark should always be rebalanced such that a ﬁxed percentage of a fund’s wholeportfolio value (rather than just the international) remains unhedged (or hedged).The important point here is that the benchmark’s hedge ratio needs to be speciﬁed andconstant – its denominator can change with the value of the underlying assets and/or withinvestment/disinvestment, but the ratio must remain constant from period to period. A constantBHR does not mean a completely immovable one, any more than an international equityallocation has to be ﬁxed for all time. Rather, the BHR has to be an anchor against whichto measure any currency overlay portfolio, and from which the strategic currency positionis measured. An investor is quite entitled to change the BHR from time to time, as indeedwould be natural given the evolving appetite for risk of a maturing fund. The implications foractive currency management evaluation may also need to be considered. If an active mandate’sguidelines restrict an active manager to hedge ratios between 0% and 100%, then a 50% hedgebenchmark has the merit of allowing an active manager to outperform in all market conditions(i.e. foreign currencies either strong or weak). By contrast, an unhedged benchmark (0% hedgeratio) does not allow an active manager to outperform when foreign currencies are strong(because 0% hedged is the best possible position), and a fully hedged benchmark (100% hedgeratio) does not allow a manager to outperform when foreign currencies are weak (because 100%hedged is the best possible position). Over a full cycle, a manager can expect to add equal6Custodians typically generate marked-to-market valuation of forward currency positions by calculating the expected cash ﬂowon a forward contract (based on the contract’s price and the price of a reversing contract in the market at the time of the valuation).They do not discount this cash ﬂow back to present value.
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value against any benchmark, but for the reasons given above, the manager’s tracking error for‘polar’ benchmarks (0% and 100%) will be wider (and more episodic) than his tracking errorfor a symmetrical (50% hedged) benchmark.Chapter 8 has a very full discussion on hedge ratios and their role in risk-reduction.7.3.16 Currency coverage and denominator calculationThe ﬁnal benchmark decision to be made relates to which currencies are to be included inthe benchmark currency hedge, which to be proxied, and which omitted. This is partly acost issue, as many currencies are capable of being hedged only at signiﬁcant cost (relativeto the more liquid currencies), and partly an investibility issue, as although it is possibleto construct a theoretical hedge price for certain currencies, trading this may in practice beimpossible.The question to resolve is whether only hedgeable currencies, or all foreign currencies in theexposure aggregate, should be used as the denominator in the benchmark returns calculation.Typically, the all-country aggregate is used as the denominator of benchmark (and actualoverlay) returns, but the benchmark returns should not include any ‘hedge’ of unhedgeablecurrencies. In these cases, unhedged returns should be used. However, there are other ways oftackling this issue, although it will be necessary to ensure that whatever approach is adoptedis also replicable in practice.Related to this issue will be speciﬁcation of the benchmark hedge ratio – if it is expressedas a percentage of international assets, is it to be a percentage of hedgeable values only, and ifnot, how is the benchmark to deal with the overweighting which will be required in relationto the hedged currencies? Typically, benchmark hedge ratios are expressed as percentages ofexposure to particular currencies, but again this is not the only way of expressing them. Again,whatever approach is adopted will need to be replicable in practice to maintain the benchmark’sinvestibility.7.3.17 UnderlayA related issue is that of the ‘underlay’ for the currency benchmark. This is the question ofwhat is being hedged/overlaid – is it to be an asset benchmark (e.g. MSCI EAFE or SalomonWorld Government Bond Index), or is it to be the assets actually owned by the investor?Subject to any regulatory requirements to limit actual currency exposures, this issue relatesto where a fund wishes to place responsibility for the investment decisions being taken. Isan equity manager who decides to underweight Japan, for example, taking a stock marketonly position (which would be the case if the currency benchmark has actual assets as itsdenominator), or a stock market and a currency position (which would be the case if thecurrency benchmark has the equity benchmark as its denominator)?As above, this question has no theoretically correct answer, but will need to be resolved aspart of the benchmark construction, and its resolution will need to be communicated to themanagers of the relevant portfolios.7.3.18 Benchmark performanceThe benchmark created after considering the issues outlined above will have its own characteristics in return and volatility terms. These will differ depending upon the speciﬁcationdeveloped within the above methodologies. To illustrate this, Figure 7.1 plots a comparison
Currency Overlay Benchmarks
141140
1800Overlay Only(RH Scale)
1600
120
1400100120080
1000800
60
Embedded + Overlay(RH Scale)
60040400Asset + Overlay (LHScale)
200
20
0
080
82
84
86
88
90
92
94
96
98
00
02
Figure 7.1 Performance of alternative benchmarks (index Jan 1980 = 100, USD base, EAFE weights,50% BHR)
of the rolling annual returns of three different benchmark methodologies’ returns for a 50%hedged BHR over the last 20 years. The ﬁgure shows the completely divergent nature of thedifferent benchmarks.Figure 7.1 compares the three acceptable benchmarks that we have discussed, and illustratesthat the choices made in benchmark construction will have signiﬁcant impact on the returns(and potentially the volatility) of the benchmark. The two ‘no-asset’ benchmarks are mirrorimages in this example; they lose that mirror-image characteristic when the BHR is not 50%.At 0% or 100% one of the two becomes a nil return (i.e. a ﬂat line). Figure 7.2 shows the samegraph with 100% BHR.In view of the wide choice available, and the hugely different proﬁles of the alternativebenchmark choices, it is important to ensure that the investor understands how the fund willuse the benchmark information, and therefore the implications of the ﬁnal choice.
7.3.19 Benchmark cash ﬂowsIt is clear from the above that if a benchmark is established which involves passive currencyhedging, then the benchmark will generate notional cash ﬂows. Figures 7.3 and 7.4 plot themonthly cash ﬂow and the rolling 12-month cash ﬂow arising from a 100% BHR 1-monthrolling hedge of MSCI EAFE – effectively World ex US. The alert reader will hae seen thesegraphs before (Figures 6.1 and 6.2).Clearly, this benchmark generates substantial cash ﬂows, and all other benchmark structureswill also generate cash ﬂows of comparable size (depending on hedge ratio and base currency).It may seem odd to say a benchmark generates cash ﬂows: let me explain. A benchmark isa portfolio that produces the benchmark return. A benchmark portfolio of, say, equities will
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1800
180Overlay Only(RH Scale)
1600
160
1400
140
1200
120
1000
100
800
80
Embedded + Overlay(RH Scale)
600
60
400
40Asset + Overlay (LHScale)
200
20
0
080
82
84
86
88
90
92
94
96
98
00
02
Figure 7.2 Performance of alternative benchmarks (index Jan 1980 = 100, USD base, EAFE weights,100% BHR)
8%6%
% International
4%2%0%−2%−4%−6%−8%82
84
86
88
90
92
94
96
98
00
02
Year
Figure 7.3 Passive hedging monthly cash ﬂow (USD base, EAFE weights, Sep 82–Sep 02, 100% hedgeratio)
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30%20%
% International
10%0%−10%−20%−30%−40%82
84
86
88
90
92
94
96
98
00
02
Year
Figure 7.4 Passive hedging 1-year cumulative cash ﬂow (USD base, EAFE weights, Sep 82–Sep 02,100% hedge ratio)
produce, for example, dividends, which have to be reported and treated in a particular way. Anequity benchmark return calculation cannot ignore dividends if it is to be a relevant comparatorfor an actual equity portfolio. Similarly, a benchmark portfolio of passive currency overlay iscomprised of a rolling series of forward currency contracts. When these contracts mature theyproduce cash ﬂows, and these have to be dealt with in the benchmark return process just likedividends from equities.Where a fund has selected the asset plus currency overlay methodology, benchmark cashﬂows will need to be incorporated into the benchmark return calculation. This arises because (asexplained above) geometric linking requires that the ‘contribution from hedging’ is reinvestedin or disinvested from the underlying assets at the end of each period. In all the published hedgedasset plus currency overlay benchmarks this reinvestment/disinvestment is not costed – i.e.it is assumed to take place without incurring bid/offer spread costs in the equity market. Thisis in line with the general benchmark practice of valuing all assets at mid-prices.Valuing long-held assets at mid-prices (on the basis that most investments are held for indeterminate and long periods) is a minor violation of the real world (since only the entry andexit prices are affected). But (again as mentioned above) forward contracts need to be rolledat (monthly) frequency, and the resulting cash ﬂow has to be raised or invested in underlying equity markets. Section 6.4 illustrates that this will cost around 0.15% p.a. if efﬁcientlyexecuted.There is nothing that can be done to avoid these cash ﬂow issues completely, but a greatdeal that can mitigate the effects and the associated costs. Certainly, an assessment of cashﬂow impact should be included in the consideration of the options when selecting a currencybenchmark. It is simply necessary to be aware that these issues are present, and to take accountof them when designing asset management structures and evaluating performance.
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Box 7.2
MSCI EAFE
MSCI EAFE is a very popular benchmark for US pension funds’ international equities.What is it? MSCI (a collaboration between investment bank Morgan Stanley and investmentmanager Capital International) publishes a wide range of equity market indices, and alsohosts an excellent website (www.msci.com). The MSCI EAFER Index (Europe, Australasia,Far East) is a free ﬂoat-adjusted market capitalisation index that is designed to measuredeveloped market equity performance, excluding the US and Canada. As of April 2002the MSCI EAFE Index consisted of the following 21 developed market country indices:Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong,Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,Sweden, Switzerland and the UK.In its unhedged form, EAFE is generally expressed in US dollars, although MSCI alsoquote it in local currency (see Box 3.7), and in currency-hedged form. In its hedged form, itis also quoted in US dollars, but the effect of foreign currency movements (i.e. non-dollar) isvirtually eliminated by hedging. This gives US investors an international benchmark whichis ‘pure equity’, and unaffected by currency movements against the dollar.The details of the maths MSCI use is in the main text, but the following core principlesapply to the calculation of hedged EAFE as well as most of the other providers’ hedgedindices:
r Hedging is conducted using forward currency contracts to sell the foreign currencies onemonth forward.
r The amount sold in the benchmark calculation is the value of the equities in each foreigncurrency at the start of each month. The size of the forward contract does not vary intramonth, even if there is a large movement in equity prices and the amount of the hedge istherefore too large or too small.r When the contract matures at the end of the month, the proﬁt or loss it has generated issettled for cash, and a new contract for the new asset amount is taken out.r The foreign exchange rates at which this settlement is made, and the new forward contracttaken out, are at WM/Reuters end-month London closing mid-prices. The price used forthe closing price is spot, and the cash is assumed to ﬂow immediately, even though spotdeals settle two days later in reality.r The cash received/required from the maturing contract is invested/disinvested from theunderlying equity markets in proportion to their index weights. That is, the index weightsof the equity index are unhedged, not hedged.r This investment/disinvestment takes place at the equity closing mid-prices for the month,i.e. reinvestment/disinvestment is instantaneous and costless.
7.4 CURRENT PRACTICETable 7.1 sets out a brief summary of the hedged currency benchmark methodology of somemajor international index providers. Please note that all providers geometrically link theirmonthly returns (which is the same as costless (dis-) investment), but those providers that cansupply daily hedged index valuations do so by geometrically linking to the prior end-monthindex value, not the prior day. Prior day returns are then derived from the change in the daily
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Table 7.1 Hedging methodology by index provider
Equities/bonds
Maturity ofhedgingcontracts
Correct(investable)methodology?
MSCI – EAFE plusother global indicesFTSE World Indices
Equities
1m
Yes
Lehman Bros. FixedIncome IndicesSalomon Bros. BondIndices
Bonds
Merrill Lynch BondIndicesJP Morgan BondIndices
Bonds
Provider/index
Equities
Bonds
Bonds
Comments
WM/Reuters mid-price;daily valuation availableNo hedged indices – ‘currency-stripped-out’ indices arebased on local currencies, and are not investable1mYesMid-price spot; forwardsderived via interest rates1mYesEstimated end-monthvalues hedged; WM/Reuters mid-price1mYesMid-prices; dailyvaluation available1mYesDaily valuation available;discounted dailyvaluation
index values. Daily returns thus produced are not ‘genuine’ daily returns, but interim valuesof a monthly process. The key to this is the denominator – it remains the prior-end-monthvalue.Two index suppliers – Salomon Smith Barney and JP Morgan – do not base the value ofthe hedge on the end-prior-month value. Instead, they estimate the end-current-month valuefrom the end-prior-month value and the current yield (SSB) and current coupon (JPM), andbase the size of the hedge on this.