Regarding the Exam 2 Afternoon. 20.6 - UGG is likely to manage exchange rate risk using forward for liquidity reason -> I thought future should be more liquid than forward? 23.6 - Higher inflation expectation means lower yield. Can someone explain to me why? Thanks!
20.6 for currencies and interest rates, forwards are preferred. (if I remember right)
yea I dont get the inflation question either I thought if inflation is expected to go up, interest rates rise, bond prices fall, yields increase.
for 20.6 (CFA text) for foreign currency management, forwards are preferred because of liquidity (the forwards market has been around a lot longer than the futures market). Also, there’s more liquidity here because corporations have transactions with specific dates (so easier to use a customized forward rather than the standardized futures)
S23dino - “if inflation is expected to go up, interest rates rise, bond prices fall, yields increase.”…that’s right, if you haven’t bought the bond yet. BUT if you already own the bond, then your stream of future cash flows is worth less and the yeild is smaller than you expected then when you bought the bond.
ahhh thanks strikershank makes sense. I don’t think I realized they were talking about a bond they held. Probably since I tried answering that question without reading the full case, I have to stop doing that.
Thanks both. strikershank, can I consider that for a bond holder, the future CF is having a higher discount as the yield increase?