Benefits of Currency Overlay Strategies

Easy Currency Management Currency Overlay

A prominent investment manager is reviewing the currency risk exposure of an international equity portfolio valued at $500 million. To mitigate this risk, the manager is considering the implementation of a currency overlay strategy. This strategy will involve dynamic hedging based on systematic analysis of currency movements. The goal is to enhance the risk-return profile of the portfolio while protecting it against adverse currency fluctuations.

The manager is particularly interested in the advantages of currency overlay versus simply using currency forwards for hedging. After conducting research, the manager identifies the following potential benefits of a currency overlay strategy: increased flexibility, potential for alpha generation, and diversified risk management.

Which of the following statements best captures a primary benefit of employing a currency overlay strategy over traditional hedging methods?

Currency overlay strategies typically involve a more passive approach to managing currency exposure.

They allow for active management of currency risks which can lead to alpha generation.

They are usually less expensive than using currency forwards for hedging.

Hint

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