Based on her investigation, Al-Khalili would most likely recommend:

A. active currency management.

B. a hedging ratio closer to 100%.

C. a narrow discretionary band for currency exposures.

Kalila Al-Khalili has been hired as a consultant to a Middle Eastern sovereign wealth fund.
The fund’s oversight committee has asked her to examine the fund’s financial characteristics and recommend an appropriate currency management strategy given the fund’s Investment Policy Statement. After a thorough study of the fund and its finances, Al-Khalili reaches the following conclusions:
• The fund’s mandate is focused on the long-term development of the country, and the royal family (who are very influential on the fund’s oversight committee) are prepared to take a long-term perspective on the fund’s investments.
• The fund’s strategic asset allocation is tilted toward equity rather than fixed-income assets.
• Both its fixed-income and equity portfolios have a sizeable exposure to emerging market assets.
• Currently, about 90% of exchange rate exposures are hedged, although the IPS allows a range of hedge ratios.
• Liquidity needs of the fund are minimal, since the government is running a balanced budget and is unlikely to need to dip into the fund in the near term to cover fiscal deficits. Indeed, the expected lifetime of country’s large oil reserves has been greatly extended by recent discoveries, and substantial oil royalties are expected to persist into the future.