CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A Swiss investor holds US equities and wants to protect the portfolio's value from a fall in the US dollar against the Swiss franc, while keeping the equity holdings. Which hedge is most appropriate?
The most appropriate hedge is selling USD forward contracts against CHF. The investor is effectively long dollars through the US equities, so a short dollar forward offsets losses from a weaker dollar and locks in the exchange rate on the hedged amount.
- ABuy USD forward contracts against CHF
- BSell USD forward contracts against CHFCorrect
- CSell Swiss franc futures against USD
Explanation
The investor is long USD through the holdings, so selling USD forward fixes the CHF value of the exposure. Buying USD forward adds to the exposure. Selling CHF futures would be a bet that CHF falls, which increases the risk.
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