Roll Yield - Reading 28 Page 260 Question 3

[mingle]

Can some one please explain solution for Q 3 -> Roll Yield is negative.
I can understand to implement hedge, MXN needs to be sold against GBP, ie, buy the Base currency GBP.
not sure why GBP is trading at forward premium?? how this implication came.
Thanks in Advance!!!

 

[mingle]

Can someone please help me out?? Cpk123,smagician pr janaksri???

 

[cpk123]

MXN/GBP spot rate (bid–offer)
One Month Ago: 20.0500/20.0580
Now: 19.5985/20.0065
1 GBP = 20.0580 MXN before, now it is worth 20.0065 MXN. So GBP has depreciated (in currency terms).
Using IRP: (F - S)/S = (ip - iB) / (1+ib)
F-S / s = negative - so HKD (price currency) is trading at a forward discount.
Go GBP (Base) will be trading at a forward premium.

 

[mingle]

I am still not getting .
I understand that GBP has depreciated from 1 month ago(20058 MXn to 20.0065 MXN).
As per my understanding, to hedge we are selling MXN and buying GBP(base currency as per MXN/GBP).
As, GBP has depreciated, so we are Buying Low and selling high, which shld lead to Positive Roll Yield.
Not sure why you referred to HKD currency above “F-S / s = negative - so HKD (price currency) is trading at a forward discount.”
Please correct my understanding.
Thanks!

 

[cpk123]

I meant MXN here. HKD was a typo.
you buy GBP at the Ask. Look at the movement of the ask price.

 

[mingle]

Sounds good. Thanks