Can somebody please explain more with the example this point …
Selling forward the currency trading at forward discount (premium) will earn a negative(positive) currency return on hedge of that currency.
This is equivalent to buying forward the other currency at forward premium (discount) which will earn a negative (positive) roll yield. Buying at forward premium (discount) is equivalent to contango (backwardation) in case of commodities.
Today’s spot rate is JPY/EUR 122.11. Suppose that the 6-month forward rate is JPY/EUR 130.27: JPY is trading at a forward discount (vis-à-vis EUR), while EUR is trading at a forward premium (vis-à-vis JPY).
If you sell JPY in the forward market, you will get fewer EUR than if you sell JPY in the spot market: a negative return.
If you sell EUR in the forward market, you will get more JPY than if you sell EUR in the spot market: a positive return.
When you hege a long position of an asset, you hege it by selling it future. So when the future is selling at a premium from today’s price, then you are selling it at a profit right? when you sell the future at a discount from todays price then you are selling at a loss.