A U.S. investor who holds a £2,000,000 investment wishes to hedge the portfolio against currency risk. The investor should: A) buy futures for £2,000,000 worth of U.S. dollars. B) sell futures for £2,000,000 worth of U.S. dollars. C) sell futures for $2,000,000 worth of British pounds.
fears currency will rise in value. Pound to $ will become more expensive. he will buy pounds today? Choice A.
C?
i will also go with C …
the US investor is LONG the pound, so to hedge they would have to short the pound. I’d say B) sell future pound if pound depreciates then the long wins and the short loses (changes offset) if pound appreciates then the long loses and the short wins (changes offset) hence the hedge.
b is sell future USD
pupdawg82 Wrote: ------------------------------------------------------- > b is sell future USD ummm, exactly the point.
yes, should be B, which is the standard answer. I was stupid, thought why not C. And just realized it says $ in C … which should have been eliminated first
made a same mistake as you ndzhai. $ sign missed
I spent half an hour on this simply couldn’t figure out what was diff between B and C lol
should it not be B, since investor is long Pound investment, he should short pound investment for 2 mn. i think it should be B.
ndzhai: can you write the correct answer from SChweser or CFAI or wherever the question was. I think correct answer is A Investor is worried and he should sell 2M worth of FC. This is same as buying 2M worth of DC. B can not be correct. Investor have FC. He can only sell forward FC. C is not correct because we are making an assumption about hedge ratio here. No indication in the question about that. Correct answer is between A and C. I think correct answer is A because the hedge ratio is 1 -> which is commn.
he is holding so he is long and to hedge he needs to short
A) Has pounds now. In future, needs to sell pounds for dollars. To hedge, he needs to sell dollars now, to buy pounds later.
CardShark Wrote: ------------------------------------------------------- > A) > > Has pounds now. In future, needs to sell pounds > for dollars. > > To hedge, he needs to sell dollars now, to buy > pounds later. Not even close, plus not to mention your comment also opens up major basis risk between pound and dollar. Listen, if you are long an asset and you want to hedge the asset’s movement, YOU SHORT THE ASSET. So LONG Pound - to hedge the exchange rate risk SHORT THE POUND and take your proceeds in USD. You’ve neutralized the currency movement and in the same time converted the position into your domestic currency. the end
Isn’t it a simple question that a US investor who will be interested in his USD position/value would liek to buy a futures contract worth GBP 2 million so that he can be guranteed a USD equivalent, set by the futures price by contracting to sell GBP at a future date at a price known today. I dotn hthink he is se whats up with the hifi lngo of basis risk
formodel2003 Wrote: ------------------------------------------------------- > whats up with the hifi lngo of basis risk hedging a long Pound by using a short future contract on Dollars is kind of like hedging a long Pork Belly position by using a short Orange Juice future… not the same asset, so basis risk is quite relevant.