Given the data in the table, the roll yield on this hedge at the forward contracts’ maturity date is most likely to be:
- L3V3R17-280 zero.
- L3V3R17-281 negative.
- L3V3R17-282 positive.
B is correct. To implement the hedge, Brixworth & St. Ives must sell MXN against the GBP, or equivalently, buy GBP (the base currency in the P/B quote) against the MXN. The base currency is selling forward at a premium, and—all else equal—its price would “roll down the curve” as contract maturity approached. Having to settle the forward contract means then selling the GBP spot at a lower price. Buying high and selling low will define a negative roll yield. Moreover, the GBP has depreciated against the MXN, because the MXN/GBP spot rate declined between one month ago and now, which will also add to the negative roll yield.
Institute, CFA. 2020 CFA Program Curriculum Level III Volume 3 . CFA Institute, 08/2019. VitalBook file.
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My question is what numbers i should be looking at to know this is a buy low sell high?