Sven Carlin explains five currency hedging strategies. International stock market investing is under the influence of currency volatility. Should you hedge the currency risk in your portfolio? How to hedge for currency risks and what is the best currency hedging strategy is explained!
Should You Currency Hedge Your Portfolio? 5 Currency Hedging Strategies Explained
Good day fellow investors. When it comes to international investing, you don't only have to worry about stock prices going up but also about currency fluctuations. So you have doubled the volatility then when you invest in the domestic market, but when you less global you have many more opportunities to invest to find better businesses cheaper margin of safety. So it's always smart to look globally when it comes to investing. Now the question is, should you care about those currency fluctuations or focus only on businesses? How to care hedge? If you care about those fluctuations? What's the best way and is it something that you should put your effort into?
In this video will explain currency hedging will explain historical results, data scientific correlations everything to show you all the necessary information you need to see whether currency hedging and what kind of currency hedging is necessary for your international portfolio. You if you don't have one international portfolio, you will also see okay, whether you should invest abroad, and what kind of risks and rewards it can bring to you.
How it works
Let's start with first what are currency hedging strategies, how can they be done? What is the historical benefits to those who have hedged or not hedge their currency exposures. And we'll finish with a very interesting analysis of the strongest currency in the world, the Swiss franc, and how Swiss investors should have been better, also unhedged or they should have focused on something else not on currency. Let's start so what is currency hedging? Now, let's say you're an American investor, you want to invest in a European company European stock.
Now you buy the stock, let's say for 100 euros you exchange your dollars into euros, you buy the stock, and then after a year the stock is at 200 euros, you would say great But indicates that the Euro let's say loses 40% against the dollar that or $1 was one euro let's make things easy $1 one euro and then after a year $1 is one point 66 euros then your gain isn't 100% it's just 20% on what you invested and that is currency risks, there are plenty of risks in currencies especially these days with all the monetary printing. So that one is really okay should I think about those investments those risks or not?
And then you want to see okay, how can you hedge about that, where if you are a longer European stock and an us investors or a European investor you US stock wherever you are from if you invest internationally, you should then go short the currency. So if the currency you are holding the acid in the evaluates, then if you are short the currency for the amount you have invested abroad, then the currency fluctuation does not impact your investment.
Currency hedging strategies with euro and ETFs
If you are short the Euro, the Euro evaluates the short the value of the short increases in relation to the decline of the devaluation of the currency. So, there are many ways that you can be short something, let's discuss four of them, and then see how those might fit you or not. So, you can head yourself in various ways.
One is that you use an ETF to short the respective currency against your currency. However, you have to understand that this is ETFs and such schemes such derivatives are mostly for daily trading and extra structure to go to zero at some point. If you read the prospectus, for example, plus there is an expense ratio of zero point 95. Costs of buying or not buying and especially are also exposed to those daily compounding returns and spreads that Might not really give you a perfect correlation to the asset.
So in my opinion, all these ETFs daily ETFs are just made and invented for those people that want to look smart when buying such derivatives such financial instruments, but the real value for long term investors is zero of this ETFs Second, you can use hedging contracts for difference so contracts for difference, you agreed to pay or get the difference in the currency pair over a specific period of time.
Again, complex currency structures actually banned in the United States. But if you're not from the United States, you might see for such contracts and then see what is the spread, what is the cost, etc, then hedging currency risk with forward contracts. A foreign exchange contract a derivative again allows you to lock in an exchange rate now for a predictable.