What does FCRP really tell you?

CFA Level II
#1

Yes, it’s expected change in spot rate minus interest rate differential or [(Es) - S]/S - (rdc - rfc)…but in english?

#2

I would consider it as a risk premium for unhedged currency exposure. FCRP=the expected foreigh currency appreciation - the interest rate difference. It seems that it is related to uncovered IRP, but it may also link to PPP and real exchange rate, but I don’t know how to link them together…

#3

FCRP = the expected change in spot rate - your forward premium/discount If they deviate from each other, then the future exchange rates are biased and there is some risk hedging. if FCRP is positive then ‘hedging’ (engaging in a forward) makes you worse off and vice versa

#4

I don’t remember FCRP… is it the Fisher relation? It doesn’t look like it from the equations above.

#5

foreign currency risk premium - Portfolio Mgmt

#6

Thanks, FCRP is a premium over the forward premium(or discount).

#7

TheAliMan Wrote: ------------------------------------------------------- > FCRP = the expected change in spot rate - your > forward premium/discount > agreed. forward premium/discount = (F-S)/S = interest rate differential (when IRP holds) > If they deviate from each other, then the future > exchange rates are biased and there is some risk > hedging. if FCRP is positive then ‘hedging’ > (engaging in a forward) makes you worse off and > vice versa i was under the impression that if FCRP is positive, that you are better off. because if FCRP is positive, then your unhedged return is the foreign interest rate PLUS the appreciation in foregin currency.