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Currency hedging is an instrument to optimise your portfolio. protect against undesirable exchange rate fluctuations. In principle, price fluctuations can affect the value of an investment. It is therefore important to know when, how and whether you want to invest your Hedging an investment against currency risk should.
In this article, you will learn all about the Fundamentals of currency risk. At the same time, you will learn whether it is even worthwhile for you as a private investor to hedge against currency risk.
The currency risk is the Risk of losses due to unfavourable exchange rate fluctuations. You are automatically exposed to currency risk if you have assets and investments in foreign currencies.
Due to the foreign currency, your assets are exposed to exchange rates, which is why the value of your investment is subject to fluctuations over time. These fluctuations are caused by different exchange rates and their development.
If you invest in shares outside your home currency area (for example in US dollars), you expose your investments to currency risk due to exchange rate fluctuations between USD/CHF. Exchange rate fluctuations occur in alleged and actual form on.
It is therefore an advantage if you know how to protect your assets. The more important question, however, is: Is it worth hedging assets against currency risk at all?
Actual currency risks arise if the underlying exchange rates (exchange rates) actually move.
Supposed currency risks On the other hand, the risk of volatility arises when you speculate that there will be a certain degree of volatility in future exchange rates, even though this may not be the case.
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There are Three main types of currency riskTransaction risk, translation risk and economic risk.
The currency risk can show up in your portfolio in the form of a loss. This only affects Values and investments that you have made abroad.
For example, if you have shares or other investments in US dollars and the USD/CHF exchange rate moves unfavourably, this may have a negative impact on your investment due to the negative effects of Exchange rate fluctuations lead to a loss in value.
The Three main reasons for fluctuating currencies are the countries' monetary policy, inflation and the political and economic situation.
Logically, there is also a Reverse currency riskthe so-called Currency gain. This arises, for example, from the interest rate policy in a country. Falling interest rates can lead to the devaluation of a currency, for example. For you as an investor, this means more favourable purchasing opportunities.
Info for advanced users: Incidentally, no premium is paid for currency risks. So you can't expect a special return/opportunity just because you take the risk.
There is no clear answer to this question. It depends on a number of factors, including your Personal risk tolerance, the Size of your portfolio and the Type of your investments.
It may make sense to decide in favour of hedging against currency risks. A decisive factor here could be a very large portfolio. If you have spread your assets across several currencies, hedging would also be conceivable here and may make sense.
Hedging against the currency risk is associated with costs. You need to decide whether the benefits of the cover outweigh the costs. Consider the following approach: The lower the risk, the lower the returns.
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There are various ways to hedge against currency risk:
The latter is the most popular method.
There are ETFs that track the performance of a specific currency or asset. These ETFs allow you to invest in a specific currency without actually buying it. This means you are not exposed to any exchange rate fluctuations. In investor-speak, you are engaging in so-called Hedging.
What is hedging?
Hedging is a Form of risk management. It means that you take measures to protect your investments from losses. With the right instruments, you can even make a profit when hedging. For example, through options or currency hedging.
However, this form of hedging also brings Disadvantages with. These disadvantages include the annual costs (TER). At the same time you forego capitalthat could generate a large return in growth or value companies. The loss would therefore be significantly greater if, for example, you missed out on 50 per cent growth in a share.
Hedging the currency risk has both advantages and disadvantages. The main advantage is that you can Protect your assets from strong price fluctuations. Other advantages and disadvantages are:
Advantages of hedging the currency risk
Disadvantages of hedging the currency risk
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Opinions are divided on the subject of currency risk hedging, and there are both good advantages and relevant disadvantages. On the one hand, you can hedge your Protect assets from unexpected losses and stabilise your portfolio in times of volatility.
On the other hand, the Protection associated with costsand you forgo potential capital gains as part of your assets are used for hedging. Ultimately, you have to decide for yourself whether the benefits outweigh the costs.
Please leave a comment and explain your opinion on currency risk hedging.