Hi everyone,
Can someone please explain to me Example 19 question 2 of the fixed income book P135 (reading 22, fixed income part 2)?
I understand part 1, you simply calculate the forward premium/discount to calculate the absolute cost of the hedge, keeping the domestic currency as the price currency…
But I don’t understand Q2 wording…
it says they believe the pound will depreciate less than the forward rate… I’m not understanding because the statement is not about the foreign EUR currency but the pound domestic currency…
does that mean the EUR will appreciate more than the forward discount/premium calculated?
The solution says Jones expects gain to be less than 1.5% cost of hedge… why is it less?
would appreciate some help on how to approach this.
thank you everyone