Understanding “Bought GBP for EUR at 1.097468 25 Sep 2017"

Probably it's a Euro bond fund with sterling exchange rate to the euro hedged but maybe the OP can enlighten us?

aroominyork wrote: »

If a bond fund’s holdings show “Bought GBP for EUR at 1.097468 25 Sep 2017” what does it mean please?

That the manager has committed to buying an amount of pounds at 1.097478 EUR per pound in late September 2017 through a forward contract. It literally means what it says.

The reason is quite possibly because the manager has some projected Euro cash at that date and does not want to run the risk of having to pay more Euros per pound to buy the sterling at that point if sterling has strengthened. There is a risk that if a pound sterling costs 1.11 Euros or 1.15 Euros or 1.2 Euros or 2.0 Euros in late September, he would not get as many pounds sterling when he wants to buy sterling for his sterling investors with the proceeds of his euro bond interest receipts or capital proceeds. He does not want that risk.

He may or may not actually have any Euro cash at that point; it could be just a simple hedge against potential currency losses on the ongoing carrying value of the Euro denominated bonds in the portfolio from time to time, and he'll roll over the forward contracts for a cash value each time they mature. The fund is generally a sterling corporate bond fund but according to the investment strategy, "a proportion of the Fund may also invest in non-sterling fixed interest securities". However, its game plan is not going to be to take excessive currency risks -so it is likely to prefer to hedge them out with contractual agreements.

aroominyork wrote: »

That doesn't really answer my question.

Well, OK, you said

Is it that the fund has committed to buying Sterling at a future date when the fund manager thinks Sterling will be stronger, eg over €1.10?

The answer is a bit of yes and no.

Yes the fund is committed to buying sterling at a specific rate on a particular date. For the purposes of its financial statements at a point in time it can value that contract by reference to spot price at the balance sheet date (or what rate it would get on a brand new contract to buy that amount of sterling on that forward future date, if they had done that at the balance sheet date). The contract might have a positive or negative value for the financial statements.

However, it doesn't necessarily mean the manager *thinks* sterling will be stronger. He might not have much of an opinion either way. However, he doesn't want to take unnecessary currency risk in a predominantly sterling-based fund. So he can just sign a contract to lock in the rate in terms of what amount of sterling he'll get back for selling X amount of Euro at that future date.