问题如下:
3. The fund manager of Portfolio B is evaluating an internally-managed 100% foreign-currency hedged strategy.
Discuss two forms of trading costs associated with this currency management strategy.
选项: 解释:
Any two of the following four points is acceptable:
• Trading requires dealing on the bid/offer spread offered by dealers. Dealer profit margin is based on these spreads. Maintaining a 100% hedge will require frequent rebalancing of minor changes in currency movements and could prove to be expensive. "Churning" the hedge portfolio would progressively add to hedging costs and reduce the hedge's benefits.
• A long position in currency options involves an upfront payment. If the options expire out-of-the- money, this is an unrecoverable cost.
• Forward contracts have a maturity date and need to be "rolled" forward with an FX swap transaction to maintain the hedge. Rolling hedges typically generate cash inflows and outflows, based on movements in the spot rate as well as roll yield. Cash may have to be raised to settle the hedging transactions (increases the volatility in the organization‘s cash accounts). The management of these cash flow costs can accumulate and become a large portion of the portfolio‘s value, and they become more expensive for cash outflows as interest rates increase.
• Hedging requires maintaining the necessary administrative infrastructure for trading (personnel and technology systems). These overhead costs can become a significant portion of the overall costs of currency trading.
这里原版书的答案太复杂了,考试的时候大概率写不出这么多句子,如果我按照何老师上课讲的,按照如下两点做答,是否可以得分,谢谢老师。
1.If roll yield in a short position is negative, it will be a cost for implenmenting hedgying trades.
2.Opportunisitic cost which may limit the appreciation portential in the foreign currency.