Impact of Currency Forward Contracts on Investment Portfolios

Easy Asset Allocation Currency Management

Jane is a portfolio manager at a global investment firm. She is currently assessing the currency exposure of her international equity portfolio, which is worth $100 million. The portfolio has significant investments in European equities, and Jane is concerned about the potential impact of currency fluctuations between the euro (EUR) and the US dollar (USD). To hedge this exposure, she considers entering into a currency forward contract to lock in the current exchange rate for future transactions.

Which of the following statements accurately describes an effect of using a currency forward contract in this scenario?

It eliminates all currency risk associated with the investments in European equities.

It allows Jane to benefit from potential appreciation of the euro against the dollar.

It provides certainty in cash flows by locking in the exchange rate, thus reducing the variability in portfolio returns.

Hint

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