clearlycanadian

In order to perfectly hedge an investment in foreign equities, a manager would most likely have to use:

A) currency forwards only.

B) both currency forwards and equity futures.

C) both currency futures and equity forwards.

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Forwards are most often used for currency risk and futures are most often used for equity risk. The manager would have to use both contracts to completely hedge all the risk.

clearlycanadian

When investing in foreign equity assets, the exchange-rate dimension of the investment generally:

A) increases the total risk.

B) diversifies the position and thus lowers risk.

C) can be completely hedged.

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The exchange-rate dimension generally adds risk. The two hedging strategies utilized by global portfolio managers to manage the risk of a foreign-denominated portfolio involve selling forward contracts on the foreign market index (to manage market risk) and selling forward contracts on the foreign currency (to manage the currency risk). They can choose to hedge one or the other, both, or neither.