Roll yield

CFA Level III Derivatives
#1

Sch book 4 Pg 111,

A few open points on the question appearing on the page.

Does cheap currency mean the one with the lower Risk free rate.

Also does cheap currency mean low yielding currency

When I read the currency management chapter (SS 14) for the very first time, I have stumbled on the following few points:

Sch book4, Pg 111

From the table given,

Q2: which foreign currency hedged would earn a positive roll return?

Q4. Comment on how the roll yield affects the decision to hedge the EUR/USD

Q5. Calculate the implied unannualized roll yield of a currency hedged for the portfolio’s long exposure to CHF

I do not want to ask you to work the numbers for me.

Kindly explain what is the approach taken to address the above questions, and how do we interpret the outcomes.

Please help.

#2

Roll yield is when you are hedging your asset for question 5. you are long CHF. if CHF is trading at a premium and you want to hedge CHF aka you want to sell CHF forward you have a positive roll yield calculated as

(Ft-F0) - (St-S0)

#3

sucking topic

#4

  1. Just remember that the roll yield relationship (positive if future is below spot and negative if future is below spot) holds true for currencies if you are buying the base currency. If you are instead buying the price currency then the relationship is inverse.

  2. If roll yield is positive then it reduces your hedging costs (vice versa). However, even if you earn a roll yield of say 3%, if you expect the unhedged return to be 5% you should leave unhedged.

  3. Roll yield (Spot - Future)/Spot. Essentially the return you solidy if you enter into a forward contract right now and the futures price converges to the spot price at expiration (assuming no change in SPOT).

#5

future-future/spot?

#6

Roll Yield for currencies is (F-S)/S. Don’t get mixed up with commodities. The perspectives are different for commodities and currencies. In most cases we are buying commodity hedges whereas with currencies we are generally hedging our exposure by selling forward. That’s the perspective you see a majority of the time in the CFAI questions.

#7

Kindly clarify

Would you hedge the currency which has a positive roll yield or a negative roll yield.

#8

Depends on your expectations. Hedge if your roll yield is better than your expected change:

If you have a positive roll yield of 3% and you expect currency to appreciate only 2%, then hedge.

If roll yield is still positive 3%, but you expect currency to appreciate 5%, then do not hedge, your 5% unhedged return is higher.

If roll yield is negative, -3%, and you expect currency to depreciate -5%, then hedge because you will lose less.

If roll yield is negative, -3% and you expect currency to depreciate -1%, then do not hedge because you expect to lose less.

#9

Well you can’t base your hedging decision on the roll yield alone. You should first look at the forecasted exchange rates which will most likely be provided and then you should decide whether to hedge or not. Remember, the roll yield is the same thing as the hedged currency return.

#10

Thank you everyone,I just finished/learning this LOS from nbook 4 schweser

Your timely support most honestly appreciated.

Good luck in your exams.

Thank you