PAT - The Payoff Advantage Tool
Bond vs. Currency

Domestic Payoff: A bond, purchased for Domestic Currency. Since the value of the bond is not dependent on any exchange rates, the payoff is constant over the entire exchange rate range.

Formula: Hd = Id (Interest Rate)

Id = 1

Foreign Payoff: "Domestic" currency. As the value of the currency over foreign currency increases, the value of the portfolio increases.

As can be seen from the diagram, a security with a payoff independent of the exchange rate on the domestic side of the market is financially equivalent to a portfolio of "domestic" currency on the foreign side of the market. In this case, regardless of the exchange rate, the value of the portfolio stays equivalent on both sides of the exchange rate market.

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