Question:
Björk then examines the fund’s EUR-denominated exposures. Due to recent monetary tightening by the Riksbank (the Swedish central bank) forward points for the SEK/EUR rate have swung to a premium. The fund’s EUR-denominated exposures are hedged with forward contracts.
Given the recent movement in the forward premium for the SEK/EUR rate, Björk can expect that the hedge will experience higher?
Answer:
experiences higher roll yield. To hedge the EUR-denominated assets Björk will be selling forward contracts on the SEK/EUR cross rate. A higher forward premium will result in higher roll return as Björk is selling the EUR forward at a higher all-in forward rate, and closing out the contract at a lower rate (all else equal), given that the forward curve is in contango
My confusion: If SEK/EUR forward rate has swung to a premium, does it also not imply (not given in the question) that the future spot rate will also have risen. Meaning, closing the SEK/EUR forward would mean buying EUR at a higher spot rate than what the agreed upon forward rate would have factored in. Or, is the future spot rate assumed to be the same as before (what they might mean by “all else equal” in the solution)?