An Asset Manager Has a Mandate to Manage a European

question 7

Essay

An asset manager has a mandate to manage a European equity portfolio for a U.S. pension client. The portfolio size is $100 million. The benchmark is some European equity index with a 50% currency hedging target. But the currency management is delegated to a currency overlay manager. The geographical breakdown of the portfolio on January 1 is as indicated below:
$$\begin{array} { l c c } & \text { Value } & \text { Value } \\\text { Ey Country } & \text { in Lacal Currency } & \text { in Dallars } \\\hline \text { British Stacks } & \text { E.10 million } & \$ 15 \text { million } \\\text { Euraland Stacks } & \in 20 \text { million } & \$ 23 \text { million } \\\text { Swiss Stacks } & \text { SFr } 1.4 \text { millian } & \$ 1 \mathrm { million } \\\text { Total } & & \$ 38 \mathrm { million }\end{array}$$ a. Assume that the currency overlay manager is neutral on currencies (that is, does not have specific forecasts on exchange rate). What would you expect the currency overlay manager to do on this portfolio?
b. Assume now that the currency overlay manager is bullish on the euro and pound but bearish on the Swiss franc (relative to the dollar). What kind of actions are you expecting from the currency overlay manager?

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Definitions:

Equality Matching

A type of social relation and fairness concept where individuals expect to receive benefits proportional to what they contribute.

Community Sharing

A form of social organization where members of a group share resources and responsibilities collectively, often emphasizing mutual aid and support.

Fiske's

Refers to social psychologist Susan Fiske's work, which includes theories on social cognition and stereotypes.

Vertical Collectivism

A cultural value that emphasizes the importance of the community or group over the individual, with a strong hierarchy and loyalty to the group.