If I buy a bond at 10% yield in currency X and want to hedge it and the implied FX yield is 12% for some reason, does this mean that I will lose 2% (10 - 12%)

I know FX implied yields are the yields that enforce covered interest rate parity.

  • 2
    $\begingroup$ Yes, it could happen. But the situation you describe is implausible. An FX yield of 12% means foreign interest rates are approx 12 points higher than domestic rates. Say for ex. domestic rates are 0% and foreign rates are 12%. Then why in a country where i.r. are 12% is there a bond yielding only 10%. It is possible of course (inverted yield curve?) and my calc is only back of the envelope anyway, but you see the issue. It is a strange set of numbers you have come up with. $\endgroup$
    – Alex C
    Mar 1, 2018 at 13:10
  • 1
    $\begingroup$ Yes, sounds like the front-end of the curve is inverted. Funding stress and liquidity concerns are pushing up the front-end in a country. The 10% bond is a 5-year bond but I think the 12% FX implied yield is for hedging 3-months and since front-end is inverted, you will lose money I think... $\endgroup$ Mar 3, 2018 at 14:10


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