Jill Pope, CFA, is a portfolio manager in the United States that will begin managing a portfolio denominated only in Euros. Her supervisor asks her to hedge the portfolio against currency fluctuations using an instrument that will effectively be an insurance policy against downside risk while offering upside potential. To do this, Pope: A) take a long position in /€ forward contracts. B) should buy put options on the /€ exchange rate. C) should sell put options on the /€ exchange rate. The answer is B... does this sign /€ make a difference? e.g.could the choices be changed to: A) should buy put options on the /€ exchange rate. B) should buy put options on the €/ exchange rate.
yes it matters. you long euros will make more $$ when the euro appreciates, so you want to hedge the euro getting weaker. if it were flipped, you’d be a call not a put buyer to protect y’self. i doubt the CFA is going to try to trip you up on something like this, though.
Lvl II stuff : the “/” sign means left currency per right currency i.e. /Euro means Dollars per Euro the ":" sign means right currency per left currency i.e. :Euro means Euro per dollar
I know this ccy pair is normally as €/, so is it valid to have /€ and €/$ for forward/future contract? What’s the convention? thx
i prefer the /Euro convention per euro but i heard the market convention is $:eur eur per dollar by the way by elimation the answer is clearly B… answer A is somewhat right BUT you would be locked into a rate and lose out on any upside potential
Hi saw this in Qbank Q: Being long the currency means holding or expecting to receive a foreign currency, therefore to hedge this foreign currency exposure you must sell forward contracts (deliver foreign currency and receive domestic currency at the expiration of the contract). Is it true ‘fward contract’ means deliver foreign currency and receive domestic currency???