MSCI Hedged Indices MSCI FX Hedge Indices MSCI Global Currency Indices

Transcription

1 MSCI Hedged Indices MSCI FX Hedge Indices MSCI Global Currency Indices

2 Conens Conens... 2 Inroducion... 4 Secion 1: Common Principles in he Calculaion of MSCI Hedged, MSCI FX Hedge and MSCI Global Currency Indices Currency Daa Calculaion Time and Frequency... 5 Secion 2: MSCI Hedged Indices Overview Consrucing he MSCI Hedged Indices Mainaining he MSCI Hedged Indices MSCI Hedged Index Calculaion Formula Calculaion of Daily Reurns Odd-Days Forwards Calculaion Using a Linear Inerpolaion... 9 Secion 3: MSCI FX Hedge Indices Overview Consrucing he MSCI FX Hedge Indices Mainaining he MSCI FX Hedge Indices MSCI FX Hedge Index Calculaion Formula Calculaion of Daily Reurns Calculaion of Odd-Days Forwards Using a Linear Inerpolaion Secion 4: MSCI Global Currency Indices Overview Consrucing he MSCI Global Currency Indices Mainaining he MSCI Global Currency Indices MSCI Global Currency Calculaion Mehodology Book Tracked Changes Clien Service Informaion is Available 24 Hours a Day Noice and Disclaimer of 20

3 Abou MSCI of 20

4 Inroducion This mehodology book covers he following indices: MSCI Hedged Indices, described in secion 2, are aimed o represen a reurn resuling from hedging an MSCI Equiy Index exposure in he Forward currency markes and conain boh an equiy and a currency componen MSCI FX Hedge Indices, described in secion 3, are aimed o measure he impac on performance of hedging he currency exposure of MSCI Equiy Indices and conain only a currency componen MSCI Global Currency Indices, described in secion 4, are aimed o measure he oal reurn of currencies of an MSCI Equiy Index and reflec boh currency appreciaion / depreciaion and ineres accruing from holding he currencies Secion 1 describes he common principles used for he calculaion of all of he above-menioned indices. 4 of 20

5 Secion 1: Common Principles in he Calculaion of MSCI Hedged, MSCI FX Hedge and MSCI Global Currency Indices 1.1 Currency Daa Closing Spo Raes MSCI uses he WM/Reuers closing Spo raes (he mid-poin of closing bid and ask raes o five decimal places), aken a 4 p.m. UK ime in he daily index calculaion and also in he deerminaion of he noional amoun of currencies o be sold forward on he roll dae. The WM/Reuers closing Spo raes are provided by he WM Company plc in conjuncion wih Reuers. MSCI may elec o use alernaive sources of exchange raes if he WM/Reuers raes are no available, or if MSCI deermines ha he WM/Reuers raes may no reflec marke condiions Closing Forward Raes MSCI uses he mid values of he 1-monh and 1-week Forward exchange raes published by WM/Reuers a 4 p.m. UK ime Missing Spo or Forward Raes In he case WM/Reuers does no provide Spo raes for specific markes on given days (for example, Chrismas Day and New Year Day), he previous business day s Spo raes will be used. If a forward premium/discoun is missing, previous business day s premium/discoun will be used Currency Crisis If here is a disrupion in he currency Spo and/or Forward marke, MSCI will analyze he siuaion and will make a decision o coninue or disconinue he inclusion of a currency in he indices on a case by case basis. Should his happen, he decision will be announced o cliens in advance. This reamen poenially could resul in currencies of cerain counries being excluded from he MSCI Hedged, MSCI FX Hedge and/or MSCI Global Currency Indices even hough hey may be sill included in he paren MSCI Equiy Indices. In his case, he resuling currency weighs may be differen from he currency weighs in he paren MSCI Equiy Index. 1.2 Calculaion Time and Frequency The MSCI Hedged, MSCI FX Hedge and MSCI Global Currency Indices are calculaed a he same ime as he underlying MSCI Equiy Index. In real ime, heir calculaion begins as soon as he paren MSCI Equiy Index is open and calculaing, and ends as soon as he WM / Reuers daa is available, or when he paren MSCI Equiy Index calculaion is finished and validaed, whichever comes laer. More deails abou calculaion ime and frequency of MSCI indices can be found in he MSCI Index Calculaion Mehodology available on Similar o he MSCI Equiy Index calculaion schedule, he official monh-end index level for he MSCI Hedged, MSCI FX Hedge and MSCI Global Currency Indices is calculaed on he las weekday of he monh. 5 of 20

6 Secion 2: MSCI Hedged Indices 2.1 Overview MSCI calculaes Hedged Indices for each Developed Marke counry as well as several Emerging Markes (on a cusom basis) and for Developed Markes regional indices, including MSCI EAFE. MSCI Hedged Indices represen a close esimaion of he reurn ha can be achieved by hedging he currency exposures of he index in he one-monh Forward marke a each end of monh. The MSCI Hedged Indices hedge each foreign currency in he index back o he home currency of he index by selling each foreign currency forward a he one-monh Forward rae. To ensure beer index replicabiliy, he amoun of Forwards sold on he las business day of he monh represens he value (or he marke capializaion) of he index as of he close of wo business days before he firs calendar day of he following monh. The foreign currency weighs, however, ake ino accoun any changes in he composiion of he index implemened as of he close of las business day of he monh. No adjusmen o he hedge is done during he monh o accoun for changes in he indices due o price movemen of securiies, corporae evens, addiions, deleions or any oher changes. In oher words he amoun hedged is kep consan over he whole monh. This simple approach replicaes he hedging process in place in many acual porfolios. Before May 2002, he MSCI Hedged Indices were compued on a monhly basis only. Before November 2009, he MSCI Hedged Indices were using foreign currency weighs and corresponding Forward noional amouns deermined on he las business day of he monh. 2.2 Consrucing he MSCI Hedged Indices Consrucing he MSCI Hedged Indices involves he following seps: Defining he home currency Idenifying he currencies o be sold Idenifying he weigh for each currency o be sold in he index Combining he unhedged paren MSCI Equiy Index reurn wih he Hedge Impac Defining he Home Currency The home currency is he home currency of an invesor invesing in inernaional equiy markes. Ofen, a cross-border invesor would like o measure he performance impac of hedging he currency exposure of his holdings relaive o his home currency. For consrucion of MSCI Hedged Indices he defaul home currency is he US Dollar. The MSCI Hedge Indices can also be consruced agains any home currency Idenifying he Currencies o be Included in he Index MSCI Equiy Indices have securiy consiuens ha can be quoed in differen foreign currencies. Each foreign currency used o denoe foreign securiies in he underlying MSCI Equiy Index is included in he calculaion of he MSCI Hedged Indices. For example, for a US-based invesor who is invesing in he MSCI Emerging Markes Index, he calculaion would combine he unhedged MSCI Emerging Markes index reurn in US dollars (USD) wih he performance impac of hedging he currency exposure of he 21 currencies of he MSCI Emerging Markes Index relaive o he US Dollar. 6 of 20

7 2.2.3 Idenifying he Weigh of Each Currency in he Index In he MSCI Hedged Indices, he weigh of each currency corresponds o he relaive marke cap weigh of he securiies quoed in ha currency in he underlying MSCI Equiy Index. More precisely, he weighs are derived from he aggregae free-floa adjused marke capializaion of he securiies quoed in he respecive currencies in he underlying MSCI Equiy Index as of he close of wo business days before he firs calendar day of following monh, bu aking ino accoun any monh end changes in he index consiuens due o rebalancing and corporae acions Combining he Unhedged Paren MSCI Equiy Index wih he Hedge Impac The MSCI Hedge Index reurn is calculaed as a sum of he paren MSCI Equiy Index reurn expressed in he home currency, and he Hedge Impac. As currency weighs and corresponding Forward noional amouns are deermined wo business days before he firs day of he following monh, an adjusmen facor needs o be inroduced in he calculaion of he Hedge Impac o accoun for he performance of he MSCI Hedged Index on he las business day of he monh. This adjusmen is described in deails in secion Mainaining he MSCI Hedged Indices The MSCI Hedged Indices are mainained wih an objecive of reflecing he evoluion of he underlying currency exposures in he MSCI Equiy Indices on a imely basis. In paricular, index mainenance involves: Reseing he weighs of he currencies o be sold in he index Rolling he Forward conracs over o he nex monh The MSCI Hedged Indices are rebalanced monhly on he las rading day of he monh, when he index will ake ino accoun he effec of rolling ino new 1-monh Forward conracs based on he newly deermined weighs of currency o be sold for he nex monh s index calculaion. The currency weighs and corresponding foreign currency noional amouns are deermined as of he close of wo business days before he firs calendar day of following monh and remain consan inra monh. This means ha no changes in he weighs are made during he monh o accoun for changes in he indices due o price movemen of securiies, corporae evens, addiions, deleions or any oher changes. 2.4 MSCI Hedged Index Calculaion Formula Calculaion Formula There are wo componens o a MSCI Hedged Index reurn: 1. The performance of he unhedged index in he home currency 2. The Hedge Impac (aimed o represen he gain or loss on he Forward conracs) in he home currency The Hedge Impac, expressed in percen, is calculaed as follows (all exchange raes are expressed as amoun of foreign currency for 1 uni of hedged currency): HI( ) NAF n Weigh FXRae i, M 2 i, M 2 i1 FFRae i, M 1 FFRae i, odddays of 20

8 where NAF M = Index calculaion dae = Noional Adjusmen Facor ha accouns for he fac ha he oal value of he currency noional amoun is no he same as he value of he MSCI Equiy Index due o he fac ha he firs is deermined on M-2 whereas he second on M-1. I is defined as he raio of he Hedged Index level on M-2 and he Hedged Index level on M-1 HedgedInde x HedgedIndex M 2 M 1 = Firs calendar day of he monh HI () = Index Hedge Impac a ime Weigh = Weigh of he currency i in he underlying MSCI Equiy Index wo business days i, M 2 i, M 2 before he sar of he curren calendar monh, bu reflecing changes in he composiion of he index o be implemened as of he close of he las business day of he previous monh FXRae = Spo rae of he currency i wo business days before he sar of he curren i, M 1 calendar monh. This erm deermines he noional amoun of he foreign currency o be sold corresponding o is weigh in he index FFRae = 1-monh Forward for he currency i one business day before he sar of he curren calendar monh (or las business day of he previous calendar monh) FFRae i, odddays = Inerpolaed odd-days Forward rae of he currency i on day. This erm is used o mark o marke he currency posiion inra monh and is equal o he Spo rae of currency i on he las day of he monh. Is calculaion is defined in Secion The Hedged Index performance is he combinaion of he unhedged performance (in hedged currency erms) and he Hedge Impac: EquiyIndex 1 HI( ) Performance of he Hedged Index = EquiyIndex where EquiyInde x = Value of he unhedged MSCI Equiy Index on he calculaion dae EquiyInde x M 1 = Value of he unhedged MSCI Equiy Index on he las business day of he previous calendar monh HI () = Hedge Impac on he index calculaion dae defined above M Calculaion Example We consider a simple example of calculaion of a wo currency index hedged o USD. We describe he hypoheical calculaion of he MSCI Hedged Index level for December 31, The daa relevan for his calculaion is displayed below. 8 of 20

9 A B C D E F G H I J CHF EUR EUR CHF EUR CHF EUR Hedged Index Paren Index CHF weigh odd-days odd-days weigh spo spo 1-M fwd 1-M fwd Level (USD) Level (USD) fwd fwd 27-Nov 35% 65% Nov Dec The Noional Adjusmen Facor is 1010/1005 = in his case and he Hedge Impac is calculaed as follows: HI ( Dec31) % % % The Hedged Index performance (monh-o-dae) for December 31 is 1550 Perf ( Dec31) % 4.28% 1500 leading o a Hedged Index level of 1005x(1+4.28%) = 1048 on December Calculaion of Daily Reurns Marking o Marke he Forward Conracs on a Daily Basis The daily calculaion of MSCI Hedged Indices marks o marke he one-monh Forward conracs on a daily basis by using an equal and offseing Forward posiion. For insance, afer 8 days, he Forward would be marked o marke using a 22-days offseing Forward in he case of a monh when he las business day of he monh is he 30h (i.e = 22) Pricing he Offseing Forward Typically, only a limied number of sandard duraion of Forwards is available in he marke. These raes are called enors, and represen one day, one week, one monh, ec. This means ha oher duraions for Forwards (called odd-days Forwards) are generally no available, bu mus be calculaed. For he sake of simpliciy, when calculaing MSCI Hedged Indices, MSCI uses a linear inerpolaion based solely on he 1-monh Forwards o esimae he value of odd-days Forwards every day during he whole monh. Odd-days Forwards are compued simply as he Spo rae plus he 1-monh Forward premium or discoun pro-raed for he number of days unil he las business day of he monh. 2.6 Odd-Days Forwards Calculaion Using a Linear Inerpolaion Calculaion Formula MSCI uses a linear inerpolaion formula o compue odd-days Forwards. The general formula is as follows: FFRae where odddays FXRae Odd days FFRae FXRae 1monh ToNbOfCalDaysDuringMonh FXRae FFRae 1 monh = Spo rae a ime = 1-Monh Forward rae a ime 9 of 20

10 Odd days = Number of days unil he las business day of he curren monh (no couning ) Calculaion Example To compue a linear inerpolaion, he following process is used, using as an example daa as of February 12, 2002: a) Obain he dae of he las business day of he monh, in our example February 28, b) Check if oday is he las business day of he monh, in which case, he Spo exchange rae is used and here is no need o compue a linear inerpolaion. c) Obain he 1-monh Forward rae as of oday, i.e. February 12, 2002, for example CAD / USD. This Forward seles in one monh. d) Compue he price difference beween he Spo and he 1-monh Forward, as of oday, February 12, 2002, called he premium (or discoun). In his example, he Spo is a , so he premium is e) Using a linear inerpolaion, compue he value, as of oday, February 12, 2002, of a Forward wih a duraion equal o he number of days unil he las business day of he monh. In our example, he las business day of he monh is he 28h, so he duraion of he Forward is = 16 days. The value of a 16 day Forward is esimaed as he Spo rae plus he premium pro raed for he period. The oal number of days aken ino accoun is he number of days in he monh, in our example 28, as here are 28 days in February Inerpolaed value of a Forward for 16 days = *(16 / 28) = = of 20

11 Secion 3: MSCI FX Hedge Indices 3.1 Overview MSCI FX Hedge Indices aim o measure he impac on performance of hedging he currency exposure of MSCI Inernaional Equiy Indices agains an invesor s home currency using a monhly Forward conrac rollover. The index aims o measure he resuls of an invesmen process of selling each of he foreign currency exposures in he MSCI Equiy Index agains he home currency a one-monh Forward rae on he las business day of he monh. The amoun of Forwards noionally sold for each currency is derived from he free-floa adjused marke capializaion weighs of he securiies quoed in ha currency in he corresponding MSCI Equiy Index. The currency weighs are fixed as of he close of wo business days before he firs calendar day of following monh bu aking ino accoun any monh end changes in he index consiuens due o rebalancing and corporae acions. Afer one monh, a similar process is performed for an amoun represening he new marke value of he index. No adjusmens o he hedges are made during he monh o accoun for changes in he indices due o price movemen of securiies, corporae evens, addiions, deleions or any oher changes. In oher words he amoun hedged is kep consan over he whole monh. To compue he daily index value, he Forwards are marked-o-marke on a daily basis using a linear inerpolaion mehodology based on Spo, 1-week and 1-monh FX Forwards premium or discouns. MSCI is currenly offering he following FX Hedge Indices: MSCI Emerging Markes FX Hedge Index in USD MSCI EAFE FX Hedge Index in USD The mehodology described in his secion is a generic mehodology ha could be applied o creae oher FX Hedge Indices agains a home currency wih weighs derived from exising MSCI Equiy Indices. The hedging mehodology is idenical o he MSCI Hedged Indices excep some differences in he way he Forwards are marked o marke inra monh. 3.2 Consrucing he MSCI FX Hedge Indices Consrucing he MSCI FX Hedge Indices involves he following seps: Defining he home currency Idenifying he currencies o be sold Idenifying he weigh for each currency o be sold in he index Defining he Home Currency The home currency is he home currency of an invesor invesing in inernaional equiy markes. Ofen, a cross-border invesor would like o measure he performance impac of hedging he currency exposure of his holdings relaive o his home currency. For consrucion of MSCI FX Hedge Indices he defaul home currency is he US Dollar (USD). The MSCI FX Hedge Indices can be consruced agains any home currency. 11 of 20

12 3.2.2 Idenifying he Currencies o be Included in he Index Inernaional MSCI Equiy Indices have securiy consiuens ha are quoed in differen foreign currencies. Each foreign currency used o denoe foreign securiies in he underlying MSCI Equiy Index is included in he calculaion of he MSCI FX Hedge indices. For example, for a US-based invesor who is invesing in emerging markes, MCSI calculaes an MSCI Emerging Markes FX Hedge Index in USD, which measures he performance impac of hedging he currency exposure of he 21 emerging marke currencies relaive o he USD corresponding o he currencies of he 21 counries in he MSCI Emerging Markes Index Idenifying he Weigh of Each Currency in he Index In he MSCI FX Hedge Indices, he weigh of each currency corresponds o he relaive marke cap weigh of he securiies quoed in ha currency in he underlying MSCI Equiy Index. More precisely, he weighs are derived from he aggregae free-floa adjused marke capializaion of he securiies quoed in he respecive currencies in he underlying MSCI Equiy Index as of he close of wo business days before he firs calendar day of following monh, bu aking ino accoun any monh end changes in he index consiuens due o rebalancing and corporae acions. 3.3 Mainaining he MSCI FX Hedge Indices The MSCI FX Hedge Indices are mainained wih an objecive of reflecing he evoluion of he underlying currency exposures in he MSCI Equiy Indices on a imely basis. In paricular, index mainenance involves: Reseing he weighs of he currencies o be sold in he index Rolling he Forward conracs over o he nex monh The MSCI FX Hedge Indices are rebalanced monhly on he las rading day of he monh, when he index will ake ino accoun he effec of rolling ino new 1-monh Forward conracs based on he newly deermined weighs of currency o be sold for he nex monh s index calculaion. The currency weighs are deermined as of he close of wo business days before he firs calendar day of following monh and remain consan inra monh This means ha no changes in he weighs are made during he monh o accoun for changes in he indices due o price movemen of securiies, corporae evens, addiions, deleions or any oher changes. 3.4 MSCI FX Hedge Index Calculaion Formula The FX Hedge Index aims o measure he performance impac of currency hedging which is calculaed as he difference beween he noional cos o hedge on he Forward conrac and he noional gain or loss on he Spo exchange rae. The daily index calculaion is given by: n 1 FHI ( ) FHI ( M 1) 1 Weigh i M 2 FXRae i, M 2 i FFRae i, M where: 1 FFRae DF(, ) 1 1 i, odddays = Index calculaion dae M = Firs calendar day of he monh FHI () = FX Hedge index in he home currency a ime FHI ( M 1) = FX Hedge index on he las day of he previous calendar monh in he home currency 12 of 20

13 Weigh = Weigh of he currency i in he underlying MSCI Equiy Index wo business days i, M 2 FXRae i, M 2 before he sar of he curren calendar monh, bu reflecing changes in he composiion of he index o be implemened as of he close of he las business day of he previous monh = Spo rae of he currency i wo business days before he sar of he curren calendar monh. This erm deermines he noional amoun of he foreign currency o be sold corresponding o is weigh in he index FFRae i, M 1 = 1-monh Forward for he currency i one business day before he sar of he curren calendar monh (or las business day of he previous calendar monh) FFRae i, odddays = Inerpolaed odd-days Forward rae of he currency i on day. This erm is used o mark o marke he currency posiion inra monh and is equal o he Spo rae of currency i on he las day of he monh. Is calculaion is described in Secion 3.6 DF () = Discoun facor beween he calculaion dae () and he las business day of he curren monh, used o calculae he value a of he Forward posiion and based on he one monh London InerBank Offered Raes (LIBOR) rae in he home currency of he index. The source for LIBOR raes is he Briish Bankers Associaion (BBA). More specifically, he value a ime of he Forward posiion iniiaed a ime M-1 is deermined by discouning he gain or loss relaive o a new offseing Forward conrac iniiaed a ime, wih he same delivery dae as he original Forward conrac. This discouned gain (loss) would be received (paid) by he invesor as he original Forward conrac is closed ou a ime. 1 = d 1 LIBOR(1 M ) 360 d = he number of calendar days remaining unil he las business day in he curren monh (no including day ) 3.5 Calculaion of Daily Reurns Marking o marke he Forward conracs on a daily basis The daily calculaion of MSCI FX Hedge Indices marks o marke he one-monh Forward conracs on a daily basis by using an equal and offseing Forward posiion. For insance, afer 8 days, he Forward would be marked o marke using a 22-days offseing Forward in he case of a monh when he las business day of he monh is he 30h (i.e = 22) Pricing he Offseing Forward Typically, only a limied number of sandard duraion of Forwards is available in he marke. These raes are called enors, and represen one day, one week, one monh, ec. This means ha oher duraions for Forwards (called odd-days Forwards) are generally no available, bu mus be calculaed. When calculaing MSCI FX Hedge Indices, MSCI uses a linear inerpolaion based boh on he 1-week and 1- monh Forwards o esimae he value of odd-days Forwards every day during he whole monh. Odddays Forwards are compued as he Spo (1-Week Forward) rae plus he premium or discoun beween 13 of 20

14 he Spo (1-Week Forward) and he 1-Week Forward (1-monh Forward), pro-raed for he number of days unil he las business day of he monh. 3.6 Calculaion of Odd-Days Forwards Using a Linear Inerpolaion Calculaion Formula If he number of days unil he las business day of he curren monh end is greaer han 7, he inerpolaion will use he 1-week Forward rae and he 1-monh Forward rae as follows: Odd days 7 FFRae odddays FFRae 1 FFRae 1 FFRae 1 week monh week ToNbOfCalDaysDuringMonh 7 where If he number of days unil he las business day of he curren monh end is less han or equal o 7, he inerpolaion will use he curren Spo rae and he 1-week Forward rae as follows: Odd days FFRae odd days FXRae FFRae 1 week FXRae 7 FFRae 1 week FFRae 1 monh = 1-Week Forward rae a ime = 1-Monh Forward rae a ime FXRae = Spo rae a ime Odd days = Number of days unil he las business day in he monh (no including ) Calculaion Example A To compue a linear inerpolaion, he following process is used, using as an example daa as of January 08, 2009: a) Check if oday is he las business day of he monh, in which case, he Spo rae is used and here is no need o compue a linear inerpolaion. b) Obain he dae of he las business day of he monh, in our example January 30, See if here are more han 7 days lef from oday January 08, 2009 ill he las business day of he monh. If here are equal o or less han 7 days lef from oday ill he las business day of he monh, hen he linear inerpolaion process is explained in example B. c) Obain he 1-week Forward and 1-monh Forward rae as of oday, e.g., on January 08, 2009, , and CAD/USD. These Forwards sele in one week and one monh from oday. The oal number of days aken ino accoun is he number of days in he curren monh, in our example 31, as here are 31 days in January There are 31-7 = 24 days beween he expiry of he 1-monh and 1-week Forwards. d) Compue he price difference beween he 1-week Forward and he 1-monh Forward, as of oday, January 08, In his example, premium difference is e) Compue he expiry dae of he 1-week Forward which is 8+7=15 f) Using a linear inerpolaion, compue he value, as of oday, January 08, 2009, of a Forward wih a duraion equal o he number of days unil he las business day of he monh. In our example, he las business day of he monh is he January 30h, so he duraion of he Forward from he expiry of he 1-week Forward is = 15 days or 22 days from January 08, of 20

15 The value of a 22 day Forward is esimaed as he 1-week Forward rae plus he premium difference beween 1-week and 1-monh Forwards proraed for he period. Inerpolaed value of a Forward seling in 22 days from oday is: = *(15/24) = = Calculaion Example B If here are less han or equal o seven days from oday ill he nex roll dae o compue a linear inerpolaion, he following process is used, using as an example daa as of January 25, 2009: a) Check if oday is he las business day of he monh, in which case, he Spo exchange rae is used and here is no need o compue a linear inerpolaion. b) Obain he dae of he las business day of he monh, in our example January 30, See if here are less han or equal o 7 days lef from oday January 25, 2009 ill he las business day of he monh. If here are more han 7 days lef from oday ill he las business day of he monh, han linear inerpolaion process is explained in example A. c) Obain he Spo and 1-week Forward rae as of oday, e.g., for January 25, 2009, , and CAD/USD. The Forward sele in one week. There are fewer han 7 days beween oday and expiry of 1-week Forward. d) Compue he price difference beween he Spo and 1-week Forward, as of oday, January 25, In his example, premium difference is e) Using a linear inerpolaion, compue he value, as of oday, January 25, 2009, of a Forward wih a duraion equal o he number of days unil he las business day of he monh. In our example, he las business day of he monh is he January 30h, so he duraion of he Forward is = 5 days. The inerpolaed value of a 5 day Forward is esimaed as he Spo rae plus he premium proraed for he period. Inerpolaed value of a Forward seling in 5 days from oday is: = *(5/7) = = of 20

16 Secion 4: MSCI Global Currency Indices 4.1 Overview MSCI Global Currency Indices measure he oal reurn of currencies of counries in a regional or composie MSCI Equiy Index, weighed by heir counry weighs. The oal reurn reflecs he currency appreciaion/depreciaion of he currencies included he Currency Index relaive o he home currency and ineres accruing from holding he currencies. For example, he MSCI Emerging Marke Currency Index in US Dollar (USD) measures he oal reurn of 21 emerging marke currencies relaive o he USD where he weigh of each currency is equal o is counry weigh in he MSCI Emerging Markes Index. The index aims o reflec an invesmen process ha uses a combinaion of monhly rades of currency Forwards agains he home currency and home currency LIBOR deposis o capure he currency and ineres rae reurns. MSCI is currenly offering he following Currency Indices: MSCI Emerging Markes Currency Indices in USD, Euro and Japanese Yen. MSCI EAFE Currency Index in USD. MSCI Europe Currency Index in USD. MSCI Asia Pacific ex Japan Currency Index in USD. The mehodology described in his guide is a generic mehodology ha could be applied o creae oher Currency Indices agains a home currency wih weighs derived from exising MSCI Inernaional Indices. 4.2 Consrucing he MSCI Global Currency Indices Consrucing he MSCI Global Currency Indices involves he following seps: Defining he home currency. Idenifying he currencies in he index. Idenifying he weigh for each currency in he index. Deermining he accrued ineres rae for each currency in he index. Each of hese seps is described in deail below Defining he Home Currency An invesor invesing in foreign exchange would like o measure he performance of his holdings relaive o his home currency. For consrucion of MSCI Global Currency Indices he defaul home currency is he US Dollar Idenifying he Currencies o be included in he Index The MSCI Global Currency Indices can be consruced agains any currency included in he index. For example, for benchmarking he reurns of a US based invesor who is invesing in emerging marke currencies, MCSI calculaes an MSCI Emerging Markes Currency Index, which reflecs he performance of 21 emerging marke currencies relaive o he USD. 16 of 20

17 4.2.3 Idenifying he Weigh of Each Currency in he Index In he MSCI Global Currency Indices, he currency weighs are derived from he aggregae free floa marke capializaion of he counries in he underlying MSCI Equiy Index. By defaul, hese are deermined as of he close of wo business days before he firs calendar day of he following monh. These currency weighs, however, ake ino accoun any changes in he composiion of he index implemened as of he close of las business day of he monh Deermining he Accrued Ineres Rae for each Currency in he Index MSCI Global Currency Indices reflec he currency appreciaion/depreciaion of currencies agains a home currency as well as he ineres earned by holding he currencies. To calculae ineres, MSCI uses he accrued foreign ineres raes from he Forward-Spo relaion in he currency markes. Please see he Appendix hereo on index calculaion formulas for more deails on he calculaion of accrued foreign ineres raes. 4.3 Mainaining he MSCI Global Currency Indices The MSCI Global Currency Indices are mainained wih an objecive of reflecing he evoluion of he underlying counry weighs on a imely basis. In paricular, index mainenance involves: Reseing he accrued foreign currency ineres raes. Reseing he weighs of he currencies included in he index. The MSCI Global Currency Indices are rebalanced monhly on he las rading day of he monh, when he currency weighs and accrued foreign ineres raes are rese for he nex monh s index calculaion Reseing he Accrued Ineres Rae for each Foreign Currency in he Index The accrued ineres for each foreign currency is rese on he las rading day of he monh. This new accrued ineres rae is accrued in he index unil he nex rebalancing dae, i.e. he las business day of he following monh Reseing he Weighs of Currencies in he Index The currency weighs are deermined wo business days before he firs calendar day of he following monh and rese afer he close of he las rading day of he monh. They remain consan inra monh, i.e. no changes in he weighs are made during he monh o accoun for changes in he indices due o price movemen of securiies, corporae evens, addiions, deleions or any oher changes. 4.4 MSCI Global Currency Calculaion Index Calculaion Formula There are wo componens o he Currency Index reurns: 1. The performance (appreciaion/depreciaion) of he consiuen currencies relaive o he home currency. 2. The foreign currency deposi ineres earned on he consiuen currencies. The Currency Index calculaion formula is defined as follows Si, CI( ) CI( M 1) Weigh i, M 1 1 Ri, fgn, M 1 i Si, M 1 where of 20

18 = Index calculaion dae expressed as he number of days elapsed since he las rebalancing dae (including weekends and non-rading days) M = Firs business day of he curren monh CI () = Currency Index a ime CI ( M 1) = Currency Index one business day before he firs day of curren monh Weigh = Weigh of currency i a ime M-1 S i, i, M 1 i, M 1 = Spo rae of currency i a ime S = Spo rae of currency i a ime M-1 R = Ineres rae for currency i deermined a ime M-1 and defined below i, fgn, M Accrued Foreign Ineres Rae Calculaion Formula The accrued foreign ineres rae is calculaed using he Forward-Spo relaionship a he ime of rebalancing. R fgn where S M 1 D, M 1 1 LIBOR(1 M ) M 1 1 FM S = Spo rae a ime M-1 M 1 F = 1-Monh Forward rae a ime M-1 M 1 LIBOR ( 1M ) = 1-Monh home currency LIBOR rae (rese monhly). M 1 D = number of days beween rebalancings, i.e., he difference in days beween he las business day of he monh and he previous monh s las business day Handling Non-rading Days a Monh End for Index and Accrued Ineres Raes Calculaion The official index level for each monh is calculaed on he las weekday of he monh. The las weekday of he monh may coincide wih an official holiday of a consiuen currency. Bu since currency markes will be open in oher counries, he Currency Index will be calculaed for ha day. If he las day of nex monh is no a rading day. For example o price a one monh Forward on Ocober 31, when he las rading day in November is he 29h, he days o mauriy for Forwards will 29 days. This will be used as number of he days in he accrued ineres rae formula. 360 D The Currency Index will accrue ineres in November for 29 days and he official index level for November will be calculaed on he same dae. If he las day of curren monh is no a rading day. For example o price a one monh Forward on November 29, which happens o be las rading day in November, he days o mauriy for Forwards seling on December 31 will be 32days. This will be used as number of he days in he accrued ineres rae formula. The Currency Index will accrue ineres in December for 32 days. The firs accrual will happen a he opening of index on December of 20

19 Mehodology Book Tracked Changes The following secions have been updaed since November 2009 Secions and Updae for currency weighs being deermined wo business days before he firs calendar day of he following monh Secions 2.2.2, 3.2.2, 4.1 and Updae o reflec he curren (as of ) number of currencies in he MSCI Emerging Markes Index 19 of 20

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