A Canadian pension fund has a significant allocation to passively managed US equity ETFs. To manage the impact of fluctuations in the CAD/USD exchange rate on their funded status, the CIO decides to implement a constant percentage currency hedge on 50% of the US equity exposure using forward contracts. This falls under which category of portfolio decision?

Question: A Canadian pension fund has a significant allocation to passively managed US equity ETFs. To manage the impact of fluctuations in the CAD/USD exchange rate on their funded status, the CIO decides to implement a constant percentage currency hedge on 50% of the US equity exposure using forward contracts. This falls under which category of portfolio decision?

Answer options:

• Strategic asset allocation, as it's a long-term policy.
• Tactical asset allocation, due to its responsiveness to currency markets.
• Factor tilt, focusing on reducing currency risk exposure. ✅ Currency management, which is a specialized form of active management or risk control.

Correct answer: Currency management, which is a specialized form of active management or risk control.

Explanation: Implementing a currency hedge on a portion of foreign assets is a specific aspect of currency management. While it influences risk and return, it's distinct from broad strategic or tactical asset allocation decisions. It's an active decision to manage a specific risk component, often using specialized instruments like forward contracts.