Identify the most likely approach for Lee to optimally locate Wilson’s portfolio on the currency risk spectrum, consistent with the IPS. Justify your response with two reasons supporting the approach.

Lee and Wilson recently completed the annual portfolio review and determined the IPS is too short-term focused and excessively risk averse. Accordingly, the IPS is revised and foreign currency is introduced as a separate asset class. Lee hires an external foreign exchange sub-adviser to implement a currency overlay program, emphasizing that it is important to structure the program so that the currency overlay is allowed in terms of strategic portfolio positioning.

Wilson Manufacturing (Wilson) is an Australian institutional client of Ethan Lee, who manages a variety of portfolios across asset classes. Wilson prefers a neutral benchmark over a rules-based approach, with its investment policy statement (IPS) requiring a currency hedge ratio between 97% and 103% to protect against currency risk. Lee has assessed various currency management strategies for Wilson’s US dollar-denominated fixed-income portfolio to optimally locate it along the currency risk spectrum. The portfolio is currently in its flat natural neutral position because of Lee’s lack of market conviction.

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Identify the most likely approach for Lee to optimally locate Wilson's portfolio on the currency risk spectrum, consistent with IPS. (Circle one.) Currency Overlay Passive Hedging Discretionary Hedging Active Currency Management Justify your response with two reasons supporting the approach.