Currency Hedging Quiz following, investor, position, forward

LBriscoe

Which of the following could be used to hedge an upcoming long USD position by a European investor?

1) High beta US stocks
2) Long duration US bonds
3) Short USD forward position

mp3bu

A short USD forward....sell the USDs forward, buy Euros

infinitybenzo

All three can be used to hedge (albeit 1 & 2 will be less effective). High beta stocks and high duration bonds will expose the investor to macro economic factors in the local market.

Darien

soddy1979 Wrote:
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> All three can be used to hedge (albeit 1 & 2 will
> be less effective). High beta stocks and high
> duration bonds will expose the investor to macro
> economic factors in the local market.


So you are long the USD, you want to have a trade that makes you neutral- you want to short the USD forward. # 1 and # 2 will get you further long the USD.

ll11

BTON04 Wrote:
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> soddy1979 Wrote:
> --------------------------------------------------
> -----
> > All three can be used to hedge (albeit 1 & 2
> will
> > be less effective). High beta stocks and high
> > duration bonds will expose the investor to
> macro
> > economic factors in the local market.
>
>
> So you are long the USD, you want to have a trade
> that makes you neutral- you want to short the USD
> forward. # 1 and # 2 will get you further long
> the USD.

True, I was misinterpreting my notes here. 1 & 2 will allow you to increase the risk of a foreign investment without incurring additional currency risk (I think this assumes you have a position in the local market already)

Unforseen

soddy1979 Wrote:
-------------------------------------------------------
> All three can be used to hedge (albeit 1 & 2 will
> be less effective). High beta stocks and high
> duration bonds will expose the investor to macro
> economic factors in the local market.


That is a long stretch. Additional information is needed to determine if the European Investor wants to continue holding US assets. From the question asked, no one will venture into choosing 1 or 2, not even you would want to do that in the exams.

Analti_Calte

Check out my caveat two posts up.