I wish to understand Forex risk and its impact on returns for foreign funds. Would appreciate responses to my hypothetical scenario below. In this scenario Currency A is the local currency and USD is the foreign currency.
Now, let's say Currency A improves from 4.50/USD at the start of the year to 4.05/USD...meaning it appreciates by 10% to the US dollar. At the same time, let's say that Fund A is a mother fund which invests in the United States (in USD), and it sees a 10% returns for the year.
If we invest in Fund A though a local Fund B (in Currency A), is it fair to say that at the end of the year the Currency A appreciation could wipe out most/all of the gains that the underlying mother fund made in USD terms in the US markets?
PS: Assume a linear 10% currency appreciation and a linear 10% gain throughout the year i.e. they increase in lock with each other and forget about management fees for the local Fund B.
Submitted January 15, 2017 at 09:31AM by learner1314 http://ift.tt/2izprsI
