This is a qbank question: 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. Your answer: A was incorrect. The correct answer was B) sell futures for £2,000,000 worth of U.S. dollars. -------------------------- The investor clearly needs to be getting dollars and selling pounds. Is “b” the answer because it is assumed that buying a future is always buying the foreign currency?
He is holding 2m of pounds (long) so in order to hedge he will have to sell (short).
the investor is long pounds, so to hedge he must go short in pound currecy forwards. (this eliminates A and C). C shorts $ which is incorrect. hence B is correct.
At the end of the investment, he will be long pounds. To hedge that risk he needs to have an offsetting short in pounds. B- sell pounds forward.