A Canadian investor holds a US equity ETF that is currency-hedged. The US dollar appreciates significantly against the Canadian dollar, and the underlying US equities perform poorly. How would the currency-hedging strategy impact the investor's return in Canadian dollar terms compared to an unhedged version of the same ETF?

Question: A Canadian investor holds a US equity ETF that is currency-hedged. The US dollar appreciates significantly against the Canadian dollar, and the underlying US equities perform poorly. How would the currency-hedging strategy impact the investor's return in Canadian dollar terms compared to an unhedged version of the same ETF?

Answer options:

• The hedging would preserve the negative impact of US equity performance. ✅ The hedging would reduce the negative impact of US equity performance and the positive impact of USD appreciation.
• The hedging would magnify the negative impact of US equity performance.
• The hedging would eliminate the negative impact of US equity performance.

Correct answer: The hedging would reduce the negative impact of US equity performance and the positive impact of USD appreciation.

Explanation: Currency hedging aims to neutralize the impact of currency fluctuations on returns. In this scenario, while the US equities perform poorly, the hedging would prevent the investor from benefiting from the US dollar's appreciation, thus reducing that positive currency impact on the overall return.