Mastering Attribution in Finance

APPENDIX E

Replicating the return of a hedged benchmark

E.1 INTRODUCTION

This appendix outlines a way to construct a set of FX hedging positions for a hedged benchmark so that its overall return is identical to its vendor-supplied return.

Benchmark providers supply security-level returns in both local and base currency returns, from which it is straightforward to calculate the aggregate, unhedged return of the benchmark.

However, things become less clear when hedging is taken into account. Hedging involves adding a number of forward or FX holdings so that the currency risk is hedged away. Unfortunately, the details of the calculation (and the forward and FX rates) are seldom made available by the benchmark vendor, who will typically only ...