which of the following most accurately represents active currency management? a.a portfolio closely matches the benchmark but neither is hedged against currency risk b. a portfolio manager sold a foreign currency forward contract in the amount invested in the foreign asset c.a portfolio which tracks the benchmark is not hedged against currency risk but the benchmark is hedged I have a follow up question.
Cool, since you might be the only guys around I will go on So Schweser says that Active currency management is represented by any difference in currency exposure between the portfolio and the benchmark. B would also be the case. B is not the answer because in this case there is no currency risk/return at all?
Is the answer B because currency forward contract only hedges the notional amount?? I am confused…
how do we know that the benchmark isn’t also hedged in situation B?
BTW the answer is indeed C They say that B is a passive currency management. I would have thought that A is passive currency management.
yep, that makes sense. hedged vs unhedged.
how about the definition of active currency management? maybe I’m too tired
Active currency management is basically any situation where the manager is assuming currency risk that is different from that of the benchmark. If the manager hedges currency risk, it is passive. (choice B above) If the manager does NOT hedge but maintains the exact same currency exposures as the unhedged benchmark, it is passive. Here, they can select different securities vs. the benchmark as long as the exposures are the same. (choice A above) If the manager ignores the currency exposures altogether, and just lets the currency exposures be determined by their security selection, they are INDIRECTLY assuming active currency management to the extent that their portfolio assets fall into different sectors compared to the benchmark. (choice c above) - assumes currency risk, but does not match the benchmark since the bench is hedged.
this is good explanation. Thanks McLeod! Key takeaway - active or passive is determined against the benchmark and so do nothing may also be active