Currency Hedging

Using contracts such as forwards to reduce the effect of exchange-rate movements on foreign investments.

Example

A global bond fund hedged to pounds aims to deliver the bonds' returns without euro or dollar swings.

Important

Hedging has a cost or benefit linked to interest rate differences, and it removes currency gains as well as losses.

Related terms

  • Hedged Share Class — A version of a fund that uses currency hedging so investors' returns are largely unaffected by movements between the fund's holdings' currencies and the share class currency.
  • Forward Rate — An exchange rate agreed today for a currency exchange that will happen on a future date.

Lessons that explain it

  • Manage the currency risk you already have; think hard before adding more — For most investors, currencies belong in portfolio thinking as a risk to manage, not a market to trade. Leveraged currency trading has no natural place in a long-term plan. (8 min)

All 578 terms in the Investing glossary