Currency Management

Question 1

LOS 19.c: Formulate an appropriate currency management program given market facts and client’s objectives and constraints.

Answer 1

1. A short time horizon for portfolio objectives.
2. High risk aversion.
3. A client who is unconcerned with the opportunity costs of missing positive currency returns.
4. High short-term income and liquidity needs.
5. Significant foreign currency bond exposure.
6. Low hedging costs.
7. Clients who doubt the benefits of discretionary management

Question 2

19.d: Compare active currency trading strategies based on economic fundamentals, technical analysis, carry-trade, and volatility trading.

Answer 2

Carry Trade

The currency with the higher interest rate will trade at a forward discount, Fo <so></so>The currency with the lower interest rate will trade at a forward premium, Fo >So

Decide whether the case requires buying or selling the base currency.

Buying forwards (and futures) or buying call options on the base currency increases exposure to the base currency.

Selling forwards (and futures) or buying put options on the base currency decreases exposure to the base currency.

Remember that:
• A call on the base currency is a put on the pricing currency.
• A put on the base currency is a call on the pricing currency.