Currency Management in International Portfolios

Hard Asset Allocation Currency Management

As a portfolio manager, you are responsible for a diversified international portfolio that includes significant allocations in both developed and emerging market equities. Recently, you have observed considerable volatility in currency exchange rates, particularly between the euro (EUR) and the U.S. dollar (USD), and are considering strategies to mitigate potential adverse impacts on your portfolio's returns. Which of the following strategies would best help you manage currency risk effectively in your asset allocation decisions?

Establish a systematic currency overlay strategy that actively adjusts currency exposures based on macroeconomic forecasts.

Limit currency exposure by only investing in domestic equity securities and avoiding international assets.

Utilize forward contracts to hedge the currency risk associated with specific foreign equity investments.

Hint

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