On the CFAI textbook 4 Session 9 Reading 19 Example 5:
Question 3 Given the data in the table, the roll yield on this hedge at the forward contracts’ maturity date is most likely to be: Correct Answer is Negative.
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. 2015 CFA Level III Volume 4 Fixed Income and Equity Portfolio Management. Wiley Global Finance, 2014-07-14. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
The question is asking at “This Hedge” = “2 months MXN/GBP forward”, maturity, the roll yield is xxx.
Since we are shorting the “rolling down the curve”, shouldn’t the roll yield be positive?