2015 PM Mock #23 Fixed Income

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Can someone please provide more guidance as to why the answer to #23 is sell euros and by dollars? The answer states, “the Forward rates for both the dollar and the euor fully reflect the interest rate differentials as expected by interest rate parity. As such, forwards reflect that the dollar is expected to appreciate relative to the pound and the euro to depreciate relative to pound. Kingsbridge’s view, however, is that the dollar will appreciate more than the forward implies and the euro will depreciate more than the forward implies. The result in actively managing the portfolio is that Kingsbridge should hedge the the euro bonds into the dollar.”
This is an area I am weak at with respect to fixed income, if anyone can explain this with the numbers used in the exhibit I would greatly appreciate it. Thank you.
 
I don’t have it in front of me, but since the investor expects the dollar to appreciate more than implied by the forward rate, then that means the principal of the investment (let’s say EUR 100,000) would get him less dollars by that time, so he locks in a certain amount of dollars on the forward rate, expecting that the Euro will depreciate more than that, and buy less dollars for him.
Remember that any foreign investment is the local return and the foreign currency return. You hedge when the foreign currency return is expected to depreciate as much, or more than implied by the forward rate, and the opposite is true.
 
Thanks Mr Smart, I understand that but the part after that- wheather selling dollars or euros that part I do not comprehand.
 
derswap07 wrote:
Thanks Mr Smart, I understand that but the part after that- wheather selling dollars or euros that part I do not comprehand.
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I do not comprehend your question either, which part?
 
BUMP
Struggling on this question. I expect Dollars to appreciate more than the forward rate, so I will buy dollars forward? Won’t this lock in a lower price
I expect euros to depreciate less than the forward rate, so I will sell euros forward? Won’t I lock in a worse price
 
My domestic currency is pounds. I expect the dollar to appreciate more than the forward rate against the pound, so why would I buy dollars forward? Won’t this lock in a lower price?
 
Don’t you mean sell dollars forward?
And yes, it will, you shouldn’t hedge in that case.
 
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