liangfeng

my take is that the question is about whether you understand the logic behind the 2 statements - not whether they are correct or not.

If the US side hedges they lock in a certain loss on the Fwd rate now to avoid the possbility of a further loss later. We know most people (and companies) are risk-seeking on the downside - ie they would rather take a punt on the downside in the hope of not making a loss at all - even if they risk an even worse loss - rather than lock in a certain loss now. So the statement that US investors would tend not to hedge the pound makes sense. Of course with IRP, etc it makes no difference whether you hedge or not in the long run (assuming the currencies are fairly priced now) - but only Buffett has a long enough time horizon.

On the UK side the journal suggests UK investors "should" hedge. Most investors are risk averse on the upside - they would rather lock in a certain profit now - rather than take a punt on a bigger profit, and risk losing the certain profit. So it is understandable that the journal says UK investors would tend to hedge.

also, if the journal is implying that the yield curve difference is temporary or artificially wide relative to fundamentals (eg on PPP terms) - then their advice would be correct.

liangfeng

The problem can be found in Volume 6 of 2008 CFAI books. Page 184. Problem #5.