for Q5, if IRP holds, dont think investor shold hedge at all… anyone to elaborate the answers in a clearer terms? many thanks for Q6, is range forward contract discussed in the text? is it required for the exam?
for Q5 - I don’t have my book with me, but i just did that section yesterday. Is that the question on expecting rate to change from 100->98 (or vice versa)? and we’re given eurocurrency rate and expected inflation rates? for Q6 - Range forward contract is essentially a combination of calls and puts - there is nothing new there.
Q5 - not exactly, it said us yield curve is lower than uk, so us iinvestors shouldn’t hedge uk investment, uk investors should hedge… true or false Q6 - correct, but couldn’t find it in the text, not sure whther it’s required for the exam…
Q5 - there was a discussion of this question yesterday (http://www.analystforum.com/phorums/read.php?13,693602,694229), but I am not sure if it answers your question. Q6 - I don’t think we’re required to remember the terms of range forward contract for the exam. If there will be one mentioned, I am sure they will define it similar to how they defined it in CFAI Question. And then it’s up to us to realize that call and put premiums should ~cancell each other and total cost of the contract is small.
much appreciated, that link help, in a sense that there are other people stuggling with the same issue… hehe I agree with the following: _________________________________________________________ Posted by: finance06 (IP Logged) [hide posts from this user] Date: April 29, 2008 11:48PM By hedging you lock in the expected appreciation/depreciation. By not hedging, you subject yourself to volatile exchange rates which may not appreciate/depreciate as expected. _________________________________________________________ but it still doesn’t help justify why us/uk invesetor shouldn’t/should hedge… one only reaosn I could think of is (assuming IRP holds), US investor already had the edge of higher interest rate than UK investor, it’s indifferent to us investor. since currency movement is very volatile, for uk investors, it’s worthwhile to hedge, coz they may not get the relavent currency gain by investing in US. it’s an issue of expect currency volatility v.s. IRP!!! here we are missing some conditions regarding investors expectation on curency movements any currency risk guru could add some more?