An asset manager has a mandate to manage a European equity portfolio for a U S pension client The portfolio size is $100 million The benchmark is some European equity index with a 50 currency hedging target But the currency management is delegated to a currency overlay manager The geographical breakdown of the portfolio on January 1 is as indicated below By Country Value in Local Currency Value in Dollars British Stocks 10 million $15 million Euroland Stocks 20 million $23 million Swiss Stocks SFr 1 4 million $1 million Total $38 million a) Assume that the currency overlay manager is neutral on currencies (that is, does not have specific forecasts on exchange rate) What would you expect the currency overlay manager to do on this portfolio b)Assume now that the currency overlay manager is bullish on the euro and pound but bearish on the Swiss franc (relative to the dollar) What kind of actions are you expecting from the currency overlay manager

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 02, 2024

An asset manager has a mandate to manage a European equity portfolio for a U.S. pension client. The portfolio size is $100 million. The benchmark

An asset manager has a mandate to manage a European equity portfolio for a U.S. pension client. The portfolio size is $100 million. The benchmark is some European equity index with a 50% currency hedging target. But the currency management is delegated to a currency overlay manager. The geographical breakdown of the portfolio on January 1 is as indicated below:

By Country	Value in Local Currency	Value in Dollars
British Stocks	10 million	$15 million
Euroland Stocks	20 million	$23 million
Swiss Stocks	SFr 1.4 million	$1 million
Total		$38 million

a) Assume that the currency overlay manager is neutral on currencies (that is, does not have specific forecasts on exchange rate). What would you expect the currency overlay manager to do on this portfolio?

b)Assume now that the currency overlay manager is bullish on the euro and pound but bearish on the Swiss franc (relative to the dollar). What kind of actions are you expecting from the currency overlay manager?