Foreign Exchange: Computing return of foreign asset

This screencast explains (using Saunders' Example 15-1) how unmatched, un-hedged foreign currency exposure directly impacts returns. The baseline is a U.S. bank funded entirely in U.S. dollars. Although asset/liability durations may match, the bank invests 50% in British pound sterling. As such, un-hedged exposure is something of a random variable that can work against the bank (if foreign currency depreciates) or in favor of the bank (if foreign currency appreciates)