If the 2009 forward hedge had been rolled forward at its maturity, using Exhibit 1, the roll yield would most likely have been:
- negative, but the currency change made it less negative.
- positive, but the currency change reduced some of this effect.
- negative, and the currency change made it even more negative.
C is correct. In implementing the hedge, euros (the base currency) must be sold against the US dollar. The base currency is selling at a discount and thus would “roll up the curve” as the contract approaches maturity. Settlement of the forward contract would entail buying euros at a higher price—that is, selling low and buying high—resulting in a negative roll yield. Since the euro has appreciated by the time the hedge needs to be extended, this tends to further increase the cost of euros to settle the original contract and makes the roll yield even more negative—that is, sell low, buy even higher.
