1 , The return on a hedged foreign stock will differ from the return on the stock in its home currency for the following reasons:

A. Changes in the exchange rates B. Changes in stock price volatility C. Changes in the interest rate differential.

2 , “Short-term futures contracts are preferable to longer-term futures contracts because they offer greater liquidity and allow the hedge amount to be altered more frequently.”

True or False?

C and False

For question 1, I’d go with B. Since the foreign stock is hedged, currency risk is hedged away and won’t affect the return. Therefore, it shouldn’t be answer A. As for C, interest rate parity says that the interest rate differential will have an offsetting effect on the currency hedge, so this won’t affect the overall return. That just leads to answer B. Stock volatility in the foreign market will increase the risk premium of the foreign stock and thus lower its price. Then again, I could be wrong since I would think arbitreurs could step in and eliminate the volatility differential.

For question 2, I’d say “False” because I don’t think long-term futures would exist if short-term ones were necessarily preferrable. An investor with a long-time horizon would prefer the longer-term futures to lock in a given exchange rate rather than roll-over and find that their desired lock-in rate is no longer offered in the market.

Changes in Basis - C?

False - Trxn costs?

second question is too vague - you cannot come up with a concrete conclusion based on the limited amount of info give…some prefer short term and others long term futures, they both have pros and cons



answers please

C and False.

Question 1 is vague, but if you have hedged the foreign stock, you hedge both market and currency risk, which means you are left with the domestic RFR, so basis risk is all that is left.

Question 2 - Short term futures have to be rolled over more incurring higher transaction costs. I think it is true that they are more liquid though.

I think:

C: if you hedge just the currency risk, you earn the foreign risk-free rate. And interest rate differential matters.



  1. C. 2. false. The hedge amount can be adjusted at any time, regardless of the contract term.(bs)

I saw the questions are exactly same as Q14 and Q17 CFAI 2011 mock exam. The answers r C and false

1C: Spot and future exchange rate differ by a basic and this basic is created by the interate rate diffential btw 2 curencies.

2 false: the transaction cost for hedge using short-term futures are greater because the contracts need to be rolled over which generate more commision (fees).

Note: the #2 ques have some more information: the investment hor is 2 years and short-term future contract is 3 month

^ You are right. Page no 302-303 Vol 5 also validate the answer.