FWD Points and Hedge impacts

CFA Level III Portfolio Management
#1

Björk then examines the fund’s EUR-denominated exposures. Due to recent monetary tightening by the Riksbank (the Swedish central bank) forward points for the SEK/EUR rate have swung to a premium. The fund’s EUR-denominated exposures are hedged with forward contracts.

Q. Given the recent movement in the forward premium for the SEK/EUR rate, Björk can expect that the hedge will experience higher:

  1. basis risk.
  2. roll yield.
  3. premia income.

CORRECT ANSWER = B

Is this question confusing or is it just me. I’ve noticed this a few times. Bjork has EUR exposures, she hedges them. Then the central bank tightens. And the question asks the impact to the hedges.

But the answer is not the impact to “existing” hedges, it’s the impact to “future” hedges. How would we be expected to know that’s what they are asking based on this question?

#2

The hedge tool is forward contract. Björk and counterparty will exchange SEK and EUR at pre-specified rate at maturity. Thus, the exchange rate change will not impact the “existing hedges”.

However, Björk will sell EUR and buy SEK in the future hedge and the roll yield will be higher due to the increased forward points for SEK/EUR rate.