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CFA Level 2 - Alternative Investments - Hedge Fund Strategies
Intermediate
1/48
Multinational company XYZ is based in the United States and has a subsidiary in the United Kingdom. The UK subsidiary has taken out a loan from a local bank denominated in British Pounds (GBP). The loan is due for repayment in 6 months, and the company is concerned about the potential appreciation of the GBP against the US Dollar (USD) during this period. Which of the following strategies would be most effective for XYZ to manage the foreign exchange risk associated with the UK subsidiary's GBP-denominated loan?
a.
Enter into a forward contract to sell GBP and buy USD at a predetermined exchange rate for the loan repayment date.
b.
Wait until the loan repayment date and exchange USD for GBP at the prevailing spot rate to repay the loan, hoping for a favorable exchange rate movement.
c.
Borrow an equivalent amount in USD from a US bank and use the proceeds to repay the GBP loan on the due date, taking advantage of the current exchange rate.
Intermediate