Roll yield in currency hedging

[RoccoLee]

In currency hedging, when foreign currency’s spot rate > future rate, downward sloping, it will lead to a negative roll yield. When foreign currency’s spot rate < future rate, upward sloping, it will lead to a positive roll yield.

What’s the logic? If foreign currency’s spot rate > future rate, downward sloping, the currency will depreciate, a short position shouldn’t have a positive return? Why there will be a negative roll yield?

Why it is just opposite to commodity roll yield?

[jpsi1]

You are associating falling/rising FX rates with depreciating/appreciating currency, when in fact it is the opposite.

If (Spot FX rate) < (Future FX rate) that means (spot value of currency) > (future value of currency), so rising FX rate means the currency is depreciating and it will lead to positive roll yield as in case with commodities.

[hlmasterchief]

Look at it this way.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency. This would give you upward slopping curve( means contango). If you have long position in b, you will have -ve roll yield (same logic as commodity).

Hope this help.

[RoccoLee]

@hlmasterchief

Look at it this way.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency. This would give you upward slopping curve( means contango). If you have long position in b, you will have -ve roll yield (same logic as commodity).

Hope this help.

When Fp/b > Sp/b, hedging will have a positive roll yield, thus we encourage to hedge. right?

[MrSmart]

@RoccoLee

In currency hedging, when foreign currency’s spot rate > future rate, downward sloping, it will lead to a negative roll yield. When foreign currency’s spot rate < future rate, upward sloping, it will lead to a positive roll yield.

What’s the logic? If foreign currency’s spot rate > future rate, downward sloping, the currency will depreciate, a short position shouldn’t have a positive return? Why there will be a negative roll yield?

Why it is just opposite to commodity roll yield?

You got it the other way round, if the future rate < spot rate, you have a positive roll yield. If the roll yield is positive, then the pricing currency should appreciate. In this case, you hedge to lock in your profit, unless you expect it to appreciate more than implied by the futures price.

[MrSmart]

@RoccoLee

@hlmasterchief

Look at it this way.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency. This would give you upward slopping curve( means contango). If you have long position in b, you will have -ve roll yield (same logic as commodity).

Hope this help.

When Fp/b > Sp/b, hedging will have a positive roll yield, thus we encourage to hedge. right?

Hedging is encouraged in most cases to maintain currency risk. Unless the manager has a certain outlook on currency movements.

Fp/b > Sp/b will have a negative roll yield if you are invested in the foreign currency (long p, short b).

The curve and price index is horizontally mirrored depending on which side of the trade you’re on.

[RoccoLee]

@MrSmart

@RoccoLee

@hlmasterchief

Look at it this way.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency. This would give you upward slopping curve( means contango). If you have long position in b, you will have -ve roll yield (same logic as commodity).

Hope this help.

Let base currency be the foreign curreny, the price currency be the domestic currency.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency, which means foreign currency will appreciate, so hedging will have a negative roll return, then we should not hedge.

Is my understanding right?

When Fp/b > Sp/b, hedging will have a positive roll yield, thus we encourage to hedge. right?

Hedging is encouraged in most cases to maintain currency risk. Unless the manager has a certain outlook on currency movements.

Fp/b > Sp/b will have a negative roll yield if you are invested in the foreign currency (long p, short b).

The curve and price index is horizontally mirrored depending on which side of the trade you’re on.

[gad4]

Units are very important. When giving an example, the key is what is appreciating/depreciaing? the foreign or base?

[RoccoLee]

@MrSmart

@RoccoLee

@hlmasterchief

Look at it this way.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency. This would give you upward slopping curve( means contango). If you have long position in b, you will have -ve roll yield (same logic as commodity).

Hope this help.

When Fp/b > Sp/b, hedging will have a positive roll yield, thus we encourage to hedge. right?

Hedging is encouraged in most cases to maintain currency risk. Unless the manager has a certain outlook on currency movements.

Fp/b > Sp/b will have a negative roll yield if you are invested in the foreign currency (long p, short b).

The curve and price index is horizontally mirrored depending on which side of the trade you’re on.

Fp/b > Sp/b will have a positive roll yield and encourage the manager to hedge.

[MrSmart]

@RoccoLee

@MrSmart

@RoccoLee

@hlmasterchief

Look at it this way.

When Fp/b > Sp/b then in the future base currency will appreciate in terms of price currency. This would give you upward slopping curve( means contango). If you have long position in b, you will have -ve roll yield (same logic as commodity).

Hope this help.

When Fp/b > Sp/b, hedging will have a positive roll yield, thus we encourage to hedge. right?

Hedging is encouraged in most cases to maintain currency risk. Unless the manager has a certain outlook on currency movements.

Fp/b > Sp/b will have a negative roll yield if you are invested in the foreign currency (long p, short b).

The curve and price index is horizontally mirrored depending on which side of the trade you’re on.

Fp/b > Sp/b will have a positive roll yield and encourage the manager to hedge.

Depending on which side of the trade you’re on. If you’re long the pricing (foreign) currency, then Fp/b > Sp/b will have a negative roll yield.