LOS d: Explain active and passive currency management, relative to a global benchmark, and formulate appropriate strategies for hedging currency exposure.

Q1. What kind of currency management is represented by a portfolio that closely tracks the benchmark but neither is hedged against currency risk?

A)   Active currency management.

B)   Passive currency management.

C)   No currency management.

Q2. If a separate currency overlay manager exists how is the portfolio asset manager’s performance evaluated?

A)   The portfolio asset manager is evaluated based on the return of the underlying asset without taking into consideration any appreciation or depreciation of the currency.

B)   The portfolio asset manager and the currency overlay manager are evaluated together based on the total return of the asset.

C)   The portfolio asset manager’s performance is evaluated based on the percentage of the total return due to the asset return.

Q3. Which of the following is the most likely reason to hedge the foreign currency? The portfolio manager:

A)   believes movement in the currency may produce a loss relative to the benchmark.

B)   wants to increase the currency exposure to certain currencies.

C)   has no views about the currency but believes certain markets look more attractive than others.

Q4. When the value of the assets to be hedged increases the amount hedged:

A)   should also be increased.

B)   does not need to be adjusted.

C)   can be decreased.

LOS d: Explain active and passive currency management, relative to a global benchmark, and formulate appropriate strategies for hedging currency exposure. fficeffice" />

Q1. What kind of currency management is represented by a portfolio that closely tracks the benchmark but neither is hedged against currency risk?

A)   Active currency management.

B)   Passive currency management.

C)   No currency management.

Correct answer is B)

When a benchmark is present then passive and active currency management are measured relative to the benchmark. Any deviation from the benchmark currency results in active currency management. If the portfolio is invested in the same assets as the benchmark this represents passive currency management.

Q2. If a separate currency overlay manager exists how is the portfolio asset manager’s performance evaluated?

A)   The portfolio asset manager is evaluated based on the return of the underlying asset without taking into consideration any appreciation or depreciation of the currency.

B)   The portfolio asset manager and the currency overlay manager are evaluated together based on the total return of the asset.

C)   The portfolio asset manager’s performance is evaluated based on the percentage of the total return due to the asset return.

Correct answer is A)

If a separate currency overlay manager exists then the portfolio asset manager is evaluated net of the currency return. In other words the asset manager is judged based only on the increase or decrease of the underlying asset value without considering the change in value of the asset’s currency.

Q3. Which of the following is the most likely reason to hedge the foreign currency? The portfolio manager:

A)   believes movement in the currency may produce a loss relative to the benchmark.

B)   wants to increase the currency exposure to certain currencies.

C)   has no views about the currency but believes certain markets look more attractive than others.

Correct answer is A)

Increasing exposure to certain currencies or markets are reasons NOT to hedge the currency but if a portfolio manager believes the currency movement by itself will cause a loss relative to the benchmark this would be a reason to hedge the currency risk.

Q4. When the value of the assets to be hedged increases the amount hedged:

A)   should also be increased.

B)   does not need to be adjusted.

C)   can be decreased.

Correct answer is A)

The hedged amount needs to be periodically adjusted to reflect changes in the asset value so as the asset value increases (decreases) the amount hedged would also need to be increased (decreased).

谢谢