Reading 19 FX question

[DJS05101985]

The end of chapter questions for reading 19 included,
[question removed by admin]

I agree C is not the answer, but I selected B not A.
For this particular investor, the investor is hedging their USD assets - not speculating. Therefore, the margin requirement should be relatively insignificant. In other words, the investor HAS $700K in USD assets and wants to hedge $700K worth of USD. So … unless they need to post more than 100% of the contract value as margin (which would be the worst FX exchange ever) margin shouldn’t come into play.
If, however, we include contango effects for futures in the “transaction costs” then the transaction costs could be very significant and expensive.
What am I missing?

 

[cpk123]

USD / EUR appears oversold - so X USD/EUR OR 1 USD = X EUR is overpriced. It is likely to fall in the future based on expectations, is how I read it. Right now you have 1 $ = 1 EUR and you will require possibly 0.9 or something < 1 in the future.
So your hedging cost (you are likely to require less USD to hedge your asset) will be LOWER in the future.
So B is also incorrect.

 

[oz001]

“The USD/EUR exchange rate has been quite volatile”
Since the futures contract is long euro, volatility may result in margin calls. The investor’s USD assets may not be liquid and margin requirements could matter.

 

[The Song of the]

Futures, unlike forwards, are exchange traded and marked-to-market on a daily basis. The result of being marked-to-market is that margin must be posted if the position declines. The described scenario [USD/EUR is volatile] suggests additional cash margin could be required.
The cash required for margin is separate from the assets being hedged. The assets can’t be used directly to post margin. Either some of the assets will have to be sold or a separate pool of cash will be necessary to meet margin calls.
The CFA assumption that futures have low transaction costs and it’s unlikely that a correct CFA answer will have you state otherwise.