Sign up  |  Log in

Currency Hedging Question

Say you have a portfolio invested in EUR equity, fully hedged(using currency forwards) back to USD. Portfolio = 100% Equity

Assume the value of the equity remain same indefinitely

However EUR then tanks, and your currency forwards is well in the money. Due to these (unrealized) currency profits. Now your portfolio = 90% Equity + 10% Cash Equivalent

Question, does that 10% of unrealised cash create an additional currency exposure? If so, is it a EUR or a USD exposure? 

To put it another way, if I were to rebalance the currency hedges now, to remain 100% fully hedged, would i now need to take on additional hedging to offset the unrealised profits also?

See how TagniFi is helping investment professionals streamline their valuation and analysis process in Excel. Sign up for a fee trial today.

If you’re fully hedged, what happens to the EUR doesn’t change a thing.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

It’s not currency exposure, but you now have an expected receivable with about 10% future value. You are exposed to interest rate risk on that part. 

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

Thanks guys. That makes sense, this expected receivable, am I right in saying its always denoted in my home currency if i were to account for it? 

This only tripped me up because Bloomberg PORT categorizes a forward hedge as 2 legs, the negative foreign leg and a positive offsetting domestic leg at T+0. But as the foreign currency erodes, to account for the P&L Bloomberg reduces the negative foreign leg rather than increasing the home leg therefore when you view the portfolio at a currency group level, your foreign currency exposure looks like its steadily growing. Maybe a setting in the forward itself.