Assume that you have invested $100,000 in British equities. When purchased the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively. At selling time, one year after purchase, they were £45 and £0.60/$1.00. If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00. The dollar rate of return would be:

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The initial investment was $100,000, which bought £50,000 worth of stock (£50 per share at £0.50/$1.00). At selling, the stock price decreased to £45, so the value in pounds is £45,000. Without hedging, converting at £0.60/$1.00 gives $75,000, a loss of $25,000 or -25%. With hedging, £50,000 was sold forward at £0.55/$1.00, yielding $90,909.09. The total return is $90,909.09 - $100,000 = -$9,090.91, or -9.09%. However, the correct calculation should consider the actual amount hedged and the remaining amount converted at the spot rate, leading to a return of -17.42%.

Assume That You Have Invested $100,000 in British Equities