Michael, Debra and Elizabeth are all using forwards to hedge their currency risk. They are each using forwards for the same reason: to protect against unwanted exposure. They each have a different mandate, and therefore apply a different methodology to their use of forwards in terms of when and why they apply them. In addition, although they are applying the forwards according to their individual mandates, they are using those forwards in essentially the exact same way.
Any differences are in terms of the specific strategies that they individually have to comply with. However, the similarities, the common actions, are in how they approach the rebalancing of their funds to stay within required tolerances. Let us take a look at the strategies each is applying with their use of forwards.
REPLICATION HEDGING STRATEGY
Michael is using what is called a “replication hedging strategy”. This means he is tasked with replicating the returns on a foreign investment fund. Therefore, if it’s a euro-based fund and the value of the fund goes up by 10% on a given day as calculated in euros, then the value must reflect an amount equal to that same 10% when calculated in US dollars for US inves