标题: 2012 Sample Q34-When Currency should be hedged [打印本页] 作者: LiquidAssets10 时间: 2013-4-22 13:45 标题: 2012 Sample Q34-When Currency should be hedged
I got this question wrong. and very confused.
I get the part that the market expects foreign currency to depreciate 0.75, well manager expects a 0.35% deprecitation.But it is always hard for me to remember whether a manager should hedge a overprice or an underpriced foreign currency?
Should we always hedge an overpriced one?作者: spartan1 时间: 2013-4-22 13:46
I’m confused as well…haha.作者: profil 时间: 2013-4-22 13:46
Is the answer not to hedge? You shouldn’t lock in a .75% depreciation if you only think it will depreciate .35%.作者: LPoulin133 时间: 2013-4-22 13:47
Its very tricky…the firm is invested in pounds so an appreciation of the pound/depreciation of the euro is a GOOD thing.
the appreciation of pound via interest rate parity ~ 0.75% . the managers expect appreciation of 0.35% (or depreciation of 0.35% of the euro). thus, you hedge to lock in the 0.75% gain (remember they’re invested in pounds and wanna gain from the pound)
i got it wrong the first time, too…tricky question作者: hinsafdar 时间: 2013-4-22 13:48
the Euro is the domestic currency, so you are holding the foreign currency, the pound
would you want your foreign currency to appreciate or depreciate? you want it to appreciate, right?
so, if you forecast that the euro will depreciate by 0.35%, that means the GBP will appreciate by +0.35%
the forward markets are telling you that the euro will depreciate by 0.75%, meaning the GBP will appreciate by +0.75%
so you want to pick the one most beneficial to your foreign currency holding of the GBP, which is +0.75% in the forward markets = you would hedge and get the +0.75% return rather than only the +0.35% gain that you are forecasting if left unhedged
