SOMEONE PLEASE CLARIFIY THIS CURRENCY QUESTION.....

CFA General
#1

Ok so, Europe (Euro) Investment Manager. Has a Pound bond in the UK 5,000,000 pounds So I know that he is LONG the Pound since expected to receive pound when sold -and I know that to Hedge this we would Sell/Short the 5,000,000 pounds volume 2, Schweser, exam 3, question 20.5 “Sold pound futures at pound 0.79/ euro” “when hedge is lifted the futures rate is pound 0.785/euro” So the see from the futures prices that the pound appreciated, which is a plus for the european manager who holds pound denominated bonds… BUT SHOULDNT THERE BE A LOSS ON THE SHORT FUTURES??? Schweser claims its a gain and adds this to the unhedged return. ---------------------------------------------------------------------------------------------- I thought we sell short futures to protect us from a depreciation of the pound, which means our short futures would pay off if pound depreciated, but in this case the pound appreciated and its a payoff. PLEASE HELP

#2

He agreed to sell his pounds and get 1/0.79 Euro = 1.265 Euro for each pound. When the hedge is actually lifted, the spot price for the pound is 0.785 /Euro same as 1.274 Euro for each pound. So he could have sold the Pounds at the higher spot rate if he had not hedged, so he lost money on his hedge. The Pound has appreciated versus the Euro, he was long Pund but sold them at the “old” cheaper rate, instead of waiting and selling them at the higher “new spot” rate.

#3

so you are saying that schweser is wrong for reporting gain on hedge?

#4

I have not seen the whole question. I am just answering the part related to the P/L on the futures.

#5

Mo your the best, I justpulled the errata and saw that there was a loss on it, makes sense, i guess because this question showed FC/Dc opposed to DC/Fc it just threw me off cheers

#6

You should not be touching Schweser at this point. It can only confuse you. You should be reading Ethics, relaxing and maybe reviewing some formulas you have troubles with. It’s too late now to look for errata and all this s***t. You have the concept down, so go and apply it and don’t do silly mistakes.

#7

thanks mo, it was bothering me because it went against my whole way of thinking, now i saw the errata and your points it solidified my way of thought, trust me im not learning anything new now, just going over gips requirements and some acronyms for forumulas. relaxing is very important, have my massage booked at 3:30 pm, see the hangover movie at 7 and bed by 10. cheers