Hedged versus unhedged currency risk exposure in investments

QuietGrowth - Hedged versus unhedged currency risk exposure in investments

‘Hedged’ and ‘unhedged’ investments can be relevant for various risks such as:

  • Currency risk
  • Interest rate risk
  • Commodity price risk
  • Market risk

This article will discuss the hedged versus unhedged currency risk exposure in investments.

‘Hedged’ and ‘unhedged’ are investment strategies regarding currency risk exposure in investments.

An unhedged investment strategy involves investing in assets denominated in a foreign currency without taking any steps to mitigate the impact of fluctuations in the currency exchange rate. This means that changes in the value of the foreign currency can impact the value of the investment in the home currency.

On the other hand, a hedged investment strategy involves taking steps to reduce the impact of currency fluctuations on the value of the investment. This hedging is achieved by using financial instruments such as currency forward contracts, options, or swaps to mitigate the impact of currency movements on the value of the investment in the home currency.

The choice between a hedged or unhedged investment strategy will depend on an investor’s specific investment objectives and risk tolerance. For example, some investors prefer to take on the added risk of currency fluctuations to benefit from potentially higher returns. In contrast, others prefer to hedge their currency exposure to reduce their overall risk.

It is important to note that hedging strategies can also involve taking on additional risk and may not always be successful in reducing risk. Therefore, understanding the risks involved in hedging and seeking professional advice before implementing a hedging strategy is important.

Our view at QuietGrowth

At QuietGrowth, we prefer unhedged securities for international equity and commodities while preferring hedged securities for international bonds. Refer to the ‘Hedged versus unhedged securities‘ section in our Investment Methodology page for more information.

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