LLQP Segregated Funds & Annuities · Component 2.1 · 30% of the exam
A client holds a segregated fund that invests in foreign equities and is told the fund is 'currency hedged'. This means that:
- Athe fund guarantees a positive return regardless of what happens in the foreign market itself
- Bthe fund cannot lose money because currency contracts offset any decline in share prices abroad
- the fund aims to remove the effect of currency movements, leaving the market return
- Dthe fund converts to Canadian dollars only when the exchange rate is favourable to the investor
Correct answer: C) the fund aims to remove the effect of currency movements, leaving the market return
Hedging uses currency contracts to neutralize movements between the foreign currency and the Canadian dollar, so the client's return reflects the foreign market rather than the exchange rate. Hedging removes currency risk in both directions and does not remove market risk.
Why the other options are wrong
- AHedging addresses currency only; the underlying shares can still fall in value sharply.
- BCurrency contracts do not offset declines in share prices; they offset exchange movements.
- DA hedge is set in advance, not applied selectively when rates happen to look good.
Exam tip
Hedged means currency-neutral, not risk-free; the market exposure is untouched.
Common mistake
Believing a hedged fund protects against losses in the foreign market.
What this tests
CISRO competency component 2.1 — Analyze the available products that meet the client's needs — which is weighted at 30% of the Segregated Funds & Annuities module. Written against the published curriculum.
More from component 2
- A segregated fund's 'guaranteed amount' after a partial withdrawal under proportional reduction is:
- A distinctive estate advantage of a segregated fund over a non-registered mutual fund held jointly with a child is:
- Segregated fund guarantees are most valuable relative to their cost when:
- A segregated fund's annual statement reports:
- Compared with a segregated fund, an exchange-traded fund (ETF) generally offers:
- A segregated fund's 'automatic death benefit reset' feature:
Practice the whole Segregated Funds & Annuities module
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