Boston 2021 - Question 23 Derivatives and Currency Management

CFA Level III Derivatives
#1

Case Study:

Evelyn Weismann, a CFA Level I candidate, is a research analyst at Bay Area Investments, which specializes in derivatives and currency management. Bluerock Holdings, a US-based firm and an institutional client of Bay Area, is looking to increase its footprint in international markets. Bluerock is in the process of conducting due diligence to acquire Concord Associates, which is domiciled in London. Concord Associates has overall holdings amounting to GBP 400 million. Liam Mason, CEO of Bluerock, meets with Weismann and expresses his intention to mitigate the GBP currency risk before closing on the acquisition of Concord. Weismann makes the following three recommendations:

Recommendation 1: Implement an ATM call option on GBP/USD to protect the exposure against appreciation of the base currency.

Solution: Recommendation 1 is correct.
If the base currency, USD, is appreciated against GBP, then the Concord Associates’ holdings of GBP 400 million will buy fewer USD in the future when the acquisition is completed.
The hedge is implemented in protecting against an appreciation of the base currency of the P/B quote, the USD. The hedge is established with an ATM call option (a long position in the USD).
P/B refers to the price of one unit of the base currency, “B,” expressed in terms of the price currency, “P.”

Why is correct the statement “the hedge is implemented in protecting against an appreciation of the base currency”? Dont you want to protect against appreciation of Price Currency (GBP?)

#2

If you have assets denominated in GBP and that you are a US investor you want to be protected against the depreciation of the GBP vs dollars. So either you are long the $ vs the GBP or you are short the GBP vs the dollar.

#3

Why protect against appreciation of GBP? That will be good for the investor.

#4

Because the US investor is about to buy the company in the UK, so the assets are not yet purchased.
If the GBP increases against the USD, the US acquirer will pay more $$$.
that is my understanding about the protection against an increase in GBP.

However, the statement 1 in the mock exam is “protect the exposure against appreciation of the base currency.” Base currency is USD. That part does not make sense.

#5

Anyone have a copy of the 2021 Boston mock to share?