Reading 29: Fixed Income Portfol....ement - Part II－LOS i whether, investment, justify

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CFA Institute Area 8-11, 13: Asset Valuation
Session 9: Portfolio Management of Global Bonds and Fixed Income Derivatives
Reading 29: Fixed Income Portfolio Management - Part II
LOS i: Recommend and justify whether to hedge or not hedge an international bond investment.

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Which of the following is a valid reason for NOT using forwards to hedge exposure to currency risk? The portfolio manager expects:

A) both home and foreign interest rates to rise.

B) that the percentage return from exposure to a currency is greater than the forward discount or premium.

C) home interest rates to rise relative to foreign interest rates.

D) the future currency exchange rate to be less than the forward exchange rate.

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Answer and Explanation

If the return from being exposed to a currency is greater than the forward premium, then using the forward to hedge will result in a return less than that if there were no hedge.