A Practical Guide to Hedging Foreign Currency

The best risk-adjusted returns available to investors could be anywhere in the world and therefore an optimally invested, long-term portfolio will have exposure to foreign assets. Investors who own foreign assets and spend domestically have an asset liability mismatch; the currency exposure of their portfolio diverges from the currency exposure of their expenditure. In this paper we discuss whether investors should hedge this exposure back to their spending currency, which key factors to consider in determining the optimal level of currency hedging, and finally how a hedging strategy should be implemented in practice.

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