Identifier: C5T4L3 · Revision: 2026-10-26 · Classification: domestic

Decision and objectives

The practical task is to separate currency, rate and equity sensitivity rows. Make the decision reproducible: name the exposure, time horizon, cash requirement and comparison baseline before selecting a product.

Objectives: Separate currency, rate and equity sensitivity rows; Combine hedge results without counting the same risk reduction twice; Quantify base-currency residuals and funding dates.

Prerequisite: C5T4L2; completed Classes 1–4 and the Stock Market School foundation or Forex School foundation. Every example is hypothetical. Prices, dates, rates, fees, contract factors, policies and tax schedules are supplied teaching inputs, not current offers or legal parameters. No live account is needed.

Mechanics

An asset can carry several drivers at once. A Turkish-issued dollar bond or a domestic fund holding it has currency, reference-rate, credit-spread and liquidity exposures. A currency hedge does not remove the dollar bond's price loss; a rate hedge does not remove its issuer spread. A domestic equity fund with foreign revenues adds another indirect exposure that cannot be assumed identical to a contractual dollar receivable.

Map driver sensitivities before adding hedges. Keep legal holdings and cash flows intact, calculate each hedge on its own terms, then recombine one total portfolio value. Avoid subtracting a currency effect twice merely because it appears in both a base-currency return and a separate FX table.

Price and return drivers

Base-currency asset value = foreign-currency value × contemporaneous FX. For a supplied small rate shock, foreign price loss ≈ foreign value × duration × yield change. Convert that loss at the scenario FX to combine with a principal currency hedge. Rate and FX interactions mean the ordering of a simplistic additive attribution can change the residual; direct repricing is the reconciliation check.

Worked case

Hypothetical domestic bond exposure USD 10,000 valued at 40 TRY/USD = TRY 400,000; modified duration 4. A parallel benchmark rise of 1 percentage point reduces its supplied approximate dollar value by USD 400 to USD 9,600. Simultaneously FX rises to 44, giving TRY 422,400 asset value, gain TRY 22,400. A short currency hedge on USD 10,000 at 40 loses TRY 40,000 at the matched final reference, so asset-plus-FX result is −TRY 17,600. A separately supplied dollar rate hedge gains USD 400, converted at 44 to TRY 17,600, restoring this simplified combined gross result to zero. Execution TRY 1,000 and funding TRY 2,000 leave −TRY 3,000 before tax.

Adverse case

If issuer spread also widens and causes another supplied USD 300 loss, the two hedges do not cover it: remaining loss USD 300 × 44 = TRY 13,200, plus costs. If the rate hedge pays only after the currency-futures loss is due, the TRY 17,600 future receipt cannot fund the current TRY 40,000 call. The unchanged gross terminal wealth is therefore not a cash-survival conclusion. Larger shocks require repricing rather than extending duration linearly.

Practical use

Verify actual holdings, fund internal hedges, notional schedules, contract currency, dates, access and price references. If a fund already hedges currency, hedge only the remaining net amount or explicitly accept an overhedge. Maintain separate margin, derivative receipt and underlying cash schedules; current official margin method and member add-ons must replace teaching inputs. Include transaction, roll, conversion, custody, funding and dated tax.

Use permitted domestic access routes and the actual instrument documents. Verify intermediary authority, investor eligibility, order/redemption terms, settlement, custody and executable size before implementation. Reconcile spread and commissions, funding, collateral, custody, product expenses, conversion and exit charges; an amount already embedded in a fill or fund unit price is not deducted again. A published mark or product description does not promise an executable price or liquidity.

Tax is excluded unless a numerical schedule is expressly supplied as hypothetical. For actual rules record income year, residence and individual/corporate status, instrument and acquisition/contract dates, taxable event and rule effective date. The GIB investment-income guide, checked 2026-10-26, covers 2025 individual income; its 2026 publication date alone cannot settle a 2026 liability.

Decision boundaries

Use combined hedges only when each targets a demonstrated residual and the full cash path is feasible. Reducing the underlying can be simpler than stacking imperfect derivatives. Decline an added hedge if its exposure is already neutralized inside the wrapper or if the needed data cannot establish a net quantity.

Practice and references

Exercise: hypothetical asset USD 5,000 at TRY 30, rate shock lowers value to USD 4,800, FX rises to 33. A matching short currency hedge covers USD 5,000, entered at TRY 30/USD and finally settled at TRY 33/USD. Calculate the combined result with a USD 200 rate-hedge receipt and TRY 800 costs. Solution: asset gain is TRY 8,400; matching short USD 5,000 currency hedge loses TRY 15,000, leaving −TRY 6,600. A USD 200 rate-hedge receipt converted at 33 offsets TRY 6,600. With costs TRY 800, combined net is −TRY 800 before other residuals.

Takeaway: Quantify base-currency residuals and funding dates with the cash dates, costs and remaining risks stated.

Product card: portfolio-decision-record. Formula: Combined-driver hedge reconciliation. Glossary: Double hedge, Driver map. Next lesson: C5T4L4. Topic test.

Sources checked 2026-10-26:

Shared reference guide