Chartered Investment Manager (CIM) Practice Exam · Question
A Canadian pension fund is using currency forwards to hedge its exposure to a U.S. dollar-denominated equity investment. What is the primary purpose of this action?
Currency hedging, using instruments like forwards, aims to mitigate the risk of adverse movements in exchange rates that could reduce the value of foreign-denom
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Question: A Canadian pension fund is using currency forwards to hedge its exposure to a U.S. dollar-denominated equity investment. What is the primary purpose of this action?
Answer options:
- To speculate on future currency movements. ✅ To reduce the impact of unfavourable exchange rate fluctuations on the investment's value.
- To increase the overall volatility of the portfolio.
- To avoid paying Canadian taxes on foreign gains.
Correct answer: To reduce the impact of unfavourable exchange rate fluctuations on the investment's value.
Explanation: Currency hedging, using instruments like forwards, aims to mitigate the risk of adverse movements in exchange rates that could reduce the value of foreign-denominated investments when converted back to Canadian dollars.
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