Over/under hedging using forward contracts

[prodigal]

Would a US manager holding EU assets over or under hedge in the following cases:

1. Gain in EU asset and EU is expected to appreciate

2. Gain in EU asset and EU is expected to depreciate

3. Loss in EU asset and EU is expected to appreciate

4. Loss in EU asset and EU is expected to depreciate

Thank you

P

[Flashback]

@prodigal

Would a US manager holding EU assets over or under hedge in the following cases:

Thank you

P

@prodigal

1. Gain in EU asset and EU is expected to appreciate

He will not hedge because he will reach double compounded positive return (1+RFC)(1+RFX)

@prodigal

2. Gain in EU asset and EU is expected to depreciate

Depending what level of FX depreciation he expects, may do nothing, may hedge FX exposure.

@prodigal

3. Loss in EU asset and EU is expected to appreciate

He may hedge RFC exposure but may do nothing because it may be short term and RFX appreciation may offset RFC losses.

@prodigal

4. Loss in EU asset and EU is expected to depreciate

As in point 1 but now double negative compounding effect, if exposure is short term, may hedge. If losses are sustainable (eg. exposure to problematic Emerging country with high political or other risks), may consider completely liquidate position.