I don’t really see this covered in the text and the answer might just be don’t even worry about this but if you invest at the foreign risk free rate and then sell the foreign currency forward your return just becomes the domestic rate.
My question is outside of “because you think depreciation in the foreign currency (assuming foreign rates are higher) would be more than that implied by IRP” or “because the IPS mandates you to invest in foreign securities (i.e. you are solely an international manager)” why would you ever do this? Why not just invest in your domestic risk free rate and skip investing abroad and selling the currency forward.
Again, outside of the two items mentioned above. I know this is a weird question and may not even be relevant.
Not sure if I understand your question, but those 2 examples you mentioned account for majority of reasons why you would do this. Deciding to remove FX risk from your portfolio, means that you have it there for the reasons outside of your control.
Another reason to hedge FX is to harvest foreign asset exposure without taking on currency risk. For example, you might like Australian bonds (strategically or tactically) but you do not want to be exposed to AUD. Tactical example would be, you think that the RBA is going to unexpectedly cut interest rates at the next meeting, and you want to express that view by holding Australian government bonds. At the same time, you suspect that this is likely to lead to devaluation of AUD relative to USD so you hedge the currency exposure.
Yea that second point makes sense. It all just depends on you views I guess. If your view if the foreign asset + hedged FX return will outperform the domestic asset then by all means invest abroad.