Currency mgt curriculum p256

CFA Level III Derivatives
#1

Phew. Does anybody know how to interprete example 4 num 1?

So should GBP exposure be hedged?

currency spot is 12.4610 and 6m forward 12.6550 (HKD/GBP), meaning sterling will be appreciated.

forecast is 12.3 meaning sterling will be depreciated.

So I thought it should be hedged. Is solution saying that? Or my english is just bad?

Massive confusing. ;/

#2

Should be hedged, because by selling GBP at forward rate you will get more HKD than you would get by selling at expected rate.

#3

Yes you want to hedge so then you can lock in the forward rate and receive more HKD (12.655 HKD/GBP), whereas if you did not hedge, then you will only receive 12.3 HKD/GBP.

#4

Thanks both! ;)))

#5

From memory, although you should hedge, I thought that there was some consideration about if the investor feels that the forein currency may appreciate in the future, and if thats the case they may put in a 50% hedge.