Woooohuuuu! Currency hedging questions JUST clicked in my head

CFA Level III
#1

I’ve always had issue with the currency hedging related questions - should i hedge or not - those questions.

For some reason, it all just clicked as I tried the 2014 AM question 7 and 2016 question 2 (the 4th time through). It’s as if my brain has given up on fighting it and just accepted the process. Low and behold, as I did that, the intuition kicked in - how and why IRP plays into it and the simple fact that if the return is lower with the exposure hedged, well for Gods sake - don’t friggin hedge it! I’ve fought this for years now and finally, 2 nights before L3 it clicks.

Hopefully the house of cards doesn’t come down before Saturday…

#2

I’ve had heaps moments like this, especially in the past week. The best!

#3

Had the same experience two days ago. Absolutely hated currency with a pashion. Went back the basics and everything just clicked in all the way to hedging with complicated options

Big relief.

#4

but why do you sometimes multiply and other times add/subtract? is it because equities are different than FI?

added in 2016 AM 2C but multiplied for 2015 9B.

#5

^^ yes… it just is what it is

add FI/ multiply equity (if thats how you are thinking about it)

#6

Just think in this way. Curreny as an other asset.

2 differenc asset forcasts are the following :

  • “Market forecast” according to IRP

  • your currency forecast.

If best forcast (increase your portfolio value more) for you is the Market forecast than go for hedging else just “just let it go” and do not hedge.

#7

Currency trading (hedging) is straightforward for us who grew up in multi currency environment and were trading currencies almost on daily basis.:slight_smile: