CFA Level 3 | Currency Management: Forward Premium/Discount vs Roll Yield

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CFA Level 3
Topic: Derivatives and Currency Management
Reading: Currency Management: An Introduction
In this video, we look at the relationship between a forward premium/discount versus the roll yield (in the context of currency hedging a portfolio of foreign securities).
Visit www.noesis.edu.sg for more info on CFA course prep in Malaysia, Singapore, and Vietnam.
#CFA #CFALevel3 #AssetAllocation #CurrencyManagement #ForwardPremium #ForwardDiscount #RollYield #CFAMalaysia #CFASingapore #CFAVietnam #CFAIndonesia #CFAInstitute #CFAExam

[@user-yk4tc9vp6j]

I love Fabian! Anytime I'm stumped I search for Fabian's videos

[@nessienessness]

Oh wow I finally understand the logic! I was able to do the second exercise on my own after your crystal clear explanation. Thank you.

[@FabianMoa]

No problem, Vanessa!

[@ashleychencooper3576]

Thank you so much! This seemed so complicated before I came across your video! Life saver

[@FabianMoa]

Great to hear!

[@caseclosed2519]

I haven't understood this concept until now. You're awesome!

[@fawaz84]

Many thanks Fabian - finally understood the concept based on CFA terminology

[@akshaymanvi3110]

Spent too much time trying to understand this concept before coming across your explanation. This video is perfect - thanks so much!

[@FabianMoa]

Glad it helped!

[@ChandanSharma-on1dn]

Great content, it cleared all my doubt

[@danioarcelloni8031]

Crystal clear Fabian, thank you very very much!

[@FabianMoa]

Glad it was helpful, Danio!

[@tshegophale2622]

Like many others, I battled with this until now. I hate rules of thumbs in finance, but I'll try this one and correct me if I'm wrong, the steps are 1) Decide where you are hedging or have exposure, that becomes your base currency. 2) To hedge that exposure, you sell/short through the the forward contract for the desired maturity. 3) Because your base rate is in the denominator of the parity formula, if the rate is lower, the ratio is>1, meaning fwd is trading at a premium (the market is in contago). 4) As you 'roll' down with maturity, when you eventually buy back what you sold/shorted, the difference will give a positive return.

[@leoz5220]

thank you very much, its so confusing to me here, i understand it after watching this video. thanks

[@GingerT1324]

Solid video, Sir. Thanks very much.

[@FabianMoa]

You're welcome, Trevor

[@Matti_us_Alpe]

Fabian, your explanations are amazing! I am still looking for your video on currencies calculations for level 1.... the notation can be so confusing.

[@Mawesome111]

You da man !

[@FabianMoa]

Thanks!

[@jameswong6392]

I think your first example is a little difficult to follow. I believe the first step is to figure out if the FORWARD rate is selling at a PREMIUM or at a DISCOUNT. Rule of thumb should be, “sell FORWARD PREMIUM will profit, so should hedge” If the forward rate is selling at discount, the strategy going ahead should be more profitable not to hedge or under hedged. (Why guaranteed a sure -ve roll yield unless you think the forward rate will be worst than offering now, more discounted) Also, please explain how you select which currency to be the base? Thank you.

[@shoaibkhan9146]

Is there an intuitive way to understand why a high yield ccy will trade at a forward discount?

[@jorakhudoyan2290]

Can you make videos about financial statements of banks and their analysis?

[@FabianMoa]

Hi Jor, I will consider it. 👍

[@madmax5435]

hey fabian, what about fixed income ' weekly volatility'. im looking at reading 20 question #32. would love a review!

[@FabianMoa]

Question 29-32 have been removed by CFAI (not examinable). Check out the CFA Level III Errata

[@alexh.4842]

I'm still very confused about this one.. pain in the ass... when u talk about selling forward at a lower price (forward discount), and after three month buying it at a higher price, u're comparing forward price(T0) vs. spot price(T3) or spot price (T0)?

[@FabianMoa]

We assume stable spot prices, so spot price(T3) = spot prices(T0). We are comparing forward price(T0) VS Spot price(T3)

[@almasaitdubai]

Hi Sir, thanks for the video, in the first example hedging produced negative return, so shall we go ahead with it ? or revers it to benefit

[@FabianMoa]

We compare it with the expected change in exchange rate. If the foreign currency is expected to depreciate by 3% and the forward currency loss is 2%, then it is better to hedge (2% loss is better than 3% loss)

[@ajaymehndiratta2736]

This video is completely illogical. USD spot may go below USD forward rate in 3 months and may lead to a profit. How could you assume that USD spot stays same for 3 months. Why would the Forward trade at a discount to start with then?

[@matthewhanson3345]

um, "convergence"

[@ajaymehndiratta2736]

@@matthewhanson3345 convergence means that the value of forward contract that you bought / sold 3 months ago is directly dependent on the spot today. There's nothing to say the spot will be forced to be equal to the forward rate (strike price of forward) that you entered into 3 months ago. Spot is independent of past forward rates.

[@matthewhanson3345]

Show me any spot price, it won't change the deal we struck. Both legs are fixed. Pnl impact is a lock, not a maybe. Maestro knows this as carry.