Sophisticated investors understand the benefits of diversifying their portfolios globally. They actively seek out investment opportunities around the world in order to reduce their exposure to their own local stock and bond markets. However, in nearly all cases this means investing in assets which are denominated in a foreign currency. This in turn brings exposure to fluctuations in the exchange rate between the foreign currency and the investor’s base currency. If ignored, this currency exposure can represent a significant unmanaged – and typically undesired – risk to the portfolio. Depreciation of a foreign currency can impair or completely offset the positive returns from a good overseas investment decision.
In this note, we examine the different possible approaches to managing this unavoidable exposure, outlining the benefits of a dynamic currency hedging approach, especially in the current environment.
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