Financial analysis

From October 2000 through March 2001, Polish bonds roared higher, benefiting from cuts in official policy interest rates in response to clear signs of slowing economic activity within the Polish economy. The dollar–Polish zloty exchange rate, which at one time had been as high as 4.75 extended its downward trend, at one point breaking through the 4.00 barrier. More and more leveraged money funds sold US dollars or Euro and bought zloty on the back of this move. For a time, “real money” asset managers did the same, increasing their currency exposure as a result of their buying of Polish bonds. There was no incentive to hedge that currency risk. Indeed, there appeared to be every incentive not to hedge — the high cost, the appreciating trend in the zloty and the desire to keep the carry of the original investment (which hedging would reduce or even eliminate).