Which of the following would be considered an “active” currency management technique? A) A U.S. portfolio manager purchases several foreign stocks paying euros equal to the amount in the benchmark. B) A portfolio manager under-weights the amount invested in European stocks compared to the benchmark. C) A French portfolio manager sells a forward contract in dollars equal to the amount of the portfolio invested in the U.S. Your answer: C was incorrect. The correct answer was B) A portfolio manager under-weights the amount invested in European stocks compared to the benchmark. Passive and active currency management can mean different things depending upon the context in which they are used. “Passive” currency management can be where a portfolio manager simply does not take a position on the currency movement and accepts whatever appreciation or depreciation of the currency in the portfolio. If their asset allocation differs from the benchmark this would be considered “active” currency management even though they may claim to be passively managing the currency. Thus passive currency management can be represented by not hedging the currency risk by investing in the foreign market in the same amount as found in the benchmark or hedging the currency risk of an investment by selling forward or futures contracts in the same amount as invested in the foreign asset.
passive management is either hedge all currency risk or have same currency risk as benchmark anything else is active
Any deviation of the FX exposure, compared to portfolio’s benchmark is considered “active”