Currency hedging strategies - reading 18 example 8

Ireland-based Old Galway Capital runs several investment trusts for its clients. Fiona Doyle has just finished rebalancing the dynamic currency hedge for Overseas Investment Trust III, which has an IPS mandate to be fully hedged using forward contracts. Shortly after the rebalancing, Old Galway receives notice that one of its largest investors in the Overseas Investment Trust III has served notice of a large withdrawal from the fund.

Given the sudden liquidity need announced, Doyle’s best course of action with regard to the currency hedge is to:

A. Doing nothing.

Can someone explain why with a decreasing size of the portfolio, there is no need to decrease the hedge ratio?

The key to this solution is that the withdrawal has been announced but has yet to take place.

Thanks GothamSenator. This is a tricky question…

You got it, happy to help. Initially through me for a loop, too. Really illustrates the criticalness of how deep they want you to analyze fact patterns. It always drove me nuts when revising because many questions require you to take an “at face value” approach while others a much more “find the trap” approach. Only way to get good at recognizing the difference is a ton of practice. I recommend writing out solutions from the start as a way to help crystalize understanding and prepare for the AM session at the same time. Best of luck.