It is more common for investors to use forwards and futures, rather than credit securities, to express country or currency views, or to manage currency exposures. These instruments are generally highly liquid and enable investors to manage currency risk separately from other portfolio exposures. For example, suppose that an investor believes that European corporate bonds will outperform Japanese corporate bonds on a currency- hedged basis, and she does not want to express a currency view.
In a portfolio managed against a global bond benchmark, she may choose to overweight European corporate bonds and underweight Japanese corporate bonds. Because European corporate bonds are primarily issued in euros and Japanese corporate bonds are issued in yen, she may sell euros forward and buy yen forward to hedge her portfolio’s unwanted currency exposure.
Maybe I’m a bit spaced out but I don’t understand why sell euros forward and buy yen forward hedges currency exposure to the Euro and Yen bond positions.
The text did not state that they expect Euro to appreciate or Yen to depreciate.
Appreciate it if someone could explain…
Thanks in advance.