Recall the following variables used in hedge analysis:
V0 – The value of the portfolio of foreign assets at time 0, stated in the foreign currency.
Vt – The value of the portfolio of foreign assets at time t, stated in the foreign currency.
Vt* - The value of the portfolio of foreign assets at time t, stated in the domestic currency.
St – The spot rate, quoted at time t.
Ft – The futures exchange rate, quoted at time t.
(Vt* - V0*) / V0* is the portfolio rate of return, stated in domestic currency terms. Vt St - V0 S0 is the gain or loss on a portfolio, stated in domestic currency terms. V0 (-Ft + F0) is the gain or loss on a futures position, stated in domestic currency terms. Therefore, the net profit/loss, in domestic currency, is equal to (Vt St - V0 S0) – V0 (Ft - F0).
