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Q1. The manager of a single-currency portfolio is investigating methods to hedge the portfolio. If he regresses the return of the portfolio on the return of the currency, the:

A)   slope coefficient of the regression represents the economic risk.

B)   slope coefficient of the regression represents the delta risk.

C)   intercept coefficient of the regression represents the economic risk.

 

Q2. One issue addressed in a minimum-variance hedge over a hedge of the principal strategy is:

A)   estimation risk.

B)   exchange rate risk.

C)   the covariance of the local return (in the foreign market) and the exchange rate.

 

Q3. An analyst is exploring methods to hedge the return of a foreign asset in a foreign country as well as hedge the foreign exchange risk of the hedged amount. To implement a minimum-variance hedge over a hedge of the principal strategy a portfolio manager needs to set the hedge ratio for:

A)   translation risk equal to one.

B)   economic risk equal to one.

C)   translation risk equal to zero.

 

Q4. In managing the risk of a portfolio denominated in a foreign currency, which of the following is not a reason for using a minimum-variance hedge over a hedge of the principal strategy? A minimum variance hedge:

A)   uses the covariance of the return on the foreign assets and exchange rate covariance.

B)   avoids having to perform a regression analysis with its associated statistical error.

C)   hedges against uncertainty concerning the return on the foreign assets.