Tracking Error Management & Sources of Return and Risk

The roll yield on the three-month INR/CHF forward to hedge the position is _closest_ to:

Incorrect. You might have gotten this answer by incorrectly using the bid prices.

Exactly! The roll yield is the percentage difference between the price of the three-month forward and the spot prices. The midpoint of the prices is used to price the forwards. $$\displaystyle \text{Midpoint Spot Rate}_{\text{INR}} = \frac{\text{EUR/CHF}_{\text{Midpoint}}}{\text{EUR/INR}_{\text{Midpoint}}}$$ >$$\displaystyle =\frac{0.94605}{0.016005}= 59.109653$$ Here, $$\displaystyle \text{EUR/CHF}_{\text{Midpoint}}=\frac{0.9354+0.9567}{2} = 0.94605$$ and $$\displaystyle \text{EUR/INR}_{\text{Midpoint}}=\frac{0.01580+0.01621}{2} = 0.016005$$. To calculate the three-month forward price, start by calculating the midpoints from the prices given. $$\displaystyle \text{EUR/CHF}_{\text{Midpoint}} = \frac{\left (0.9354+\frac{6}{10{,}000} \right ) + \left (0.9567+\frac{8}{10{,}000} \right )}{2} = 0.94675$$ $$\displaystyle \text{EUR/INR}_{\text{Midpoint}} = \frac{\left (0.01580+\frac{-1}{10{,}000} \right ) + \left (0.01621+\frac{-2}{10{,}000} \right )}{2} = 0.015855$$ So the midpoint price of the three-month forward is $$\displaystyle \text{Midpoint 3-Month Forward Price}_{\text{CHF/INR}} = \frac{\text{EUR/CHF}_{\text{Midpoint}}}{\text{EUR/INR}_{\text{Midpoint}}}$$ >$$\displaystyle =\frac{0.94675}{0.015855}= 59.7130$$. Finally, calculate the three-month forward premium. $$\displaystyle \text{Three-Month Forward Premium} = \frac{\text{Midpoint Spot Rate}_{\text{INR/CHF}}}{\text{Three-Month Midpoint Forward Rate}_{\text{INR/CHF}}}$$ >$$\displaystyle =\frac{59.109653} {59.7130} -1= -0.0101$$

Incorrect. One way of getting this answer is to calculate the forecasted appreciation from the firm’s spot rate forecast.

-0.0070.

-0.0101.

0.0173.