Currency Hedging: The Cost of Managing Risk

“Between calculated risk and reckless decision-making lies the dividing line between profit and loss” ― Charles Duhigg
4 min read
Currency Hedging

Currency Hedging: The Cost of Managing Risk

“Between calculated risk and reckless decision-making lies the dividing line between profit and loss” ― Charles Duhigg


4 min read

Businesses and investors are increasingly exposed to risks stemming from fluctuations in foreign exchange rates. Currency movements can impact the value of investments, affect profitability, and introduce uncertainty into international transactions.

However, there is a way to mitigate your exposure to currency risk, and this is through a strategy known as ‘hedging’.

For you, the investor, hedging is simple as it involves simply buying a fund that has ‘hedged’ in the name or fund literature.

Under the bonnet, currency hedging involves a range of financial instruments designed to mitigate the potential adverse effects of currency fluctuations on your investment portfolios, business revenues, and cashflows.

This article aims to help you make informed decisions about whether currency hedging is the right strategy for your investments, or not. So, read below to find out more!

What is Currency Hedging?

Currency hedging is a risk management strategy used to mitigate the impact of currency fluctuations on international investments or transactions. 

It involves taking positions in the foreign exchange (FOREX) market to offset potential losses that can come from changes in exchange rates.

Currency hedging aims to protect against adverse movements in currency values that could erode the value of investments denominated in foreign currencies.

One common method of currency hedging is through the use of financial derivatives such as forward contracts, futures contracts, options, and swaps.

Essentially, by hedging a certain currency, you are taking a position on the future direction of that currency’s movements. This is akin to placing a bet on whether a particular currency will appreciate or depreciate. So, you are locking in a specific exchange rate to protect yourself from adverse currency movements.

These instruments allow you to lock in exchange rates at predetermined levels, providing certainty about future cash flows and reducing the uncertainty associated with currency risk. However, whilst currency hedging can help smooth out your returns and protect against losses in currency fluctuations, it also comes with costs and complexities that you need to consider carefully.

Is Currency Hedging Good or Bad?

The effectiveness of currency hedging depends on various factors, including your specific circumstances, market conditions, and investment objectives.

As mentioned, you are placing a bet on whether a particular currency will appreciate or depreciate, locking in a specific exchange rate, and you do not get to do this for free!

Just like any insurance policy, currency hedging requires paying a premium, typically in the form of management fees or transaction costs. These costs can then eat into your potential profits and diminish your returns (which is especially true if the currency movements do not move in your favour).

In some cases, currency hedging can provide valuable protection against currency risk, particularly for those with significant exposure to foreign markets or those holding international assets. You can even potentially enhance risk-adjusted returns over the long term whilst enjoying reduced volatility in your portfolio.

However, do not be fooled, hedging does not eliminate currency risk entirely and may not always be effective in volatile or unpredictable market conditions.

What’s more is that hedging decisions should not just be a quick thought of “I am investing in a foreign currency so I should buy a fund that implements hedging”. In reality, this decision requires careful consideration and expertise, and improper hedging strategies can result in unintended consequences or losses. 

Therefore, you should weigh the pros and cons of currency hedging carefully before implementing any strategies. Fortunately, Patterson Mills is here to help, so contact us today!

Considerations You Need To Make

When evaluating whether currency hedging is suitable, there are several consideratinos for you to make.

  1. Determine your risk tolerance and investment objectives
  2. Find out the level of exposure to foreign currencies in your  existing or planned portfolio
  3. Consider the outlook for currency markets, economic fundamentals, and geopolitical developments that could impact exchange rates.
  4. Evaluate the costs associated with currency hedging and compare them to the potential benefits.
    1. This includes considering the impact of hedging costs on investment returns and whether the expected reduction in currency risk justifies the expenses incurred.
  5. Assess the performance of different hedging strategies under various market scenarios and their historical effectiveness in managing currency risk.
    1. Remember, past performance is not indicative of future performance
  6. Consider the prevailing interest rate differentials between currencies
  7. Consult with Patterson Mills

Could Topiary Help Your Investments?

Our Advisers at Patterson Mills understand the importance of currency risk management and offer tailored solutions to help you navigate the challenges of international markets and decide if hedging would be suitable for you.

Whether you’re looking to hedge currency exposure in your investment portfolio or protect your business from currency fluctuations, our team can provide the guidance and support you need.

Get in touch with us today and book your initial, no-cost and no-obligation meeting.

Send us an e-mail to or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.

Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.