What Is Forex Hedging?

Register today for inside access to our thought-provoking coverage of the global financial markets! With gyrations in major currencies, including the U. A basic rule of thumb is that if you want to reduce risk, you should hedge. And if you want return beyond the yield and capital appreciation of your bonds, you may want to leave your currency exposure unhedged at times.

Hedging FOREX | Definition

For a dollar investor, of course, that would mean when the dollar is weakening. Over the past two years, the dollar has shown volatility, with the U. All that movement brings into relief the issue of hedging the currency exposure of an international or global bond portfolio. Indeed, currencies accounted for about half of the volatility of the Barclays global aggregate bond index from to , according to data from Goldman Sachs Group.

That index, unhedged, had an annualized volatility of 4. But volatility is higher in unhedged portfolios.

Fund managers may easily be able to stomach the volatility of an unhedged currency exposure. Their customers, maybe not so much. Fund managers say they view currencies as assets in their portfolios that are distinct from the bonds. Options offer another way to hedge currency exposure. When spot currency prices move away from forward prices, however, options can be more difficult to use than forwards.

This aspect arises because the options position then needs to be adjusted in what is known as delta hedging, points out Michael Goosay, senior portfolio manager at Goldman Sachs Asset Management in New York.

Opportunity abounds there, of course, as currencies frequently fluctuate. So what should U. The dollar may well be headed lower, money managers say. BlackRock recently bought Mexican bonds in its Strategic Global Bond Fund.

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