Your client, Mrs. DaSousa, would like to diversify her portfolio by investing in a global equity fund. What should you advise her about the foreign currency risk?
A.
The fund manager can hedge the exchange risk by buying foreign currency through futures contracts
B.
The value of the fund will go up if the Canadian dollar increases in value against the foreign currency
C.
The foreign exchange risk will be offset by the lower liquidity risk
D.
The fund may provide a hedge against the Canadian dollar
Global equity funds can act as a hedge against a decline in the Canadian dollar’s value, increasing the investment’s value in Canadian dollars if the foreign currency strengthens. The feedback from the document states:
"Global mutual funds are attractive because they can provide a hedge against a decline in the relative value of the Canadian dollar. For example: if investors buy a Japanese fund, and then the value of the Canadian dollar falls relative to the yen, the Canadian dollar value of that investment will increase even if the value of the fund’s units in yen has remained unchanged."
[Reference: Chapter 12 – Riskier Mutual Fund ProductsLearning Domain: Analysis of Mutual Funds, , , ]
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