Hedging Currency

Hedging Currency

 

We are going on a quick trip to Las Vegas and when exchanging our Canadian dollars for US dollars it made me think how important currency exchange rates are when you invest internationally. The Canadian Dollar is 77.85 US as I write this. SUCKS !!

Should you be concerned about hedging your currencies if you live in Canada?

The change in value of a foreign currency relative to the Canadian dollar is an important factor to consider before investing in stocks that invest in non-Canadian assets. For example, if you invest in a stock in a US stock exchange that you bought in US dollars, the appreciation or depreciation of the US dollar against the Canadian dollar makes a big difference in your investment return. You have two options; hedged or unhedged.

How to Hedge Currency

While a currency hedge can be implemented in several different ways, the most popular are: Hedging with currency Swaps, hedging with forward contracts, and hedging with options. Here is a link if you would like more info on how hedging is preformed hedging currency. For the average investor that buys mutual funds, index funds, or ETFs this is very simple and a currency hedge is done for you when you buy a hedged product. Another option is a currency hedge through derivatives. Sounds complicated, but it’s actually pretty simple. All you need is a brokerage account that can trade currency futures.

 

It’s important for investors to consider their risk for currency exposure before investing in a stock or investments with a foreign currency. Some argue that over the long-term, currency fluctuations balance out, so there’s no need to hedge. Those who support currency hedging argue that most investors don’t hold an investment long enough for the effects of currency volatility. Dan Bortolotti from the Couch Potato Portfolio has an article couch potato portfolio. It is an older article from 2014, but it is still valid and argues the case for not hedging currency.

What We Have Done

We do both in our portfolio. See our investment structure here. We have approximately 50% hedged, although after reading Dan’s argument for not hedging I am reconsidering my decision as we tend to hold our core investments forever. For now we will stick with what we have. Check out the Word of the Week Hedging Currency.

Comments

  1. I agree that the Canadian Dollar sucks and has sucked for a while now. I used to buy items from the US and go pick them from across the border, but that no longer makes sense. The conversion rate these days are just plain ridiculous.

    On a different note, I used to trade foreign currencies (forex) a while back, although not necessarily as an hedging tool. These days, I stick to “plain vanilla” index funds.

    • Thanks Enoch, I have often wondered about forex trading. I hope you did well at trading forex ? I don’t think I would be very good at it and seems like you have to use a lot of leverage to make good money at trading it. ( I am way to conservative)

  2. Have fun in Vegas! We are going to Hawaii for a month as well. We have a USD account so that we can keep some money there just in case the exchange is not favourable.

    Have you tried Norbert’s Gambit? I just used it recently to convert CAD to USD (used it before the CAD tanked). I have a post on my blog about it somewhere.

    • Hawaii is so nice. I also have a US dollar account unfortunately it was a little low from my last trip. I will check out­ Norbert’s Gambit I have never heard of them. Have a great time in Hawaii !

  3. I have never really thought that much about hedging – I have always thought that currency risk was just part of the risk variable involved with investing outside of your home country. It definitely sucks with the Canadian dollar being so weak, but at the same time, when you buy something based in a foreign currency, and it does well, the gain seems greater (almost like trading on leverage).

    • I never really thought that much about hedging either. When we owned mutual funds I left it up to the money manager, but once I moved into ETFs and managed them myself I put 50% of our international funds in hedge products. The MER on hedged funds are not that much more than the unhedged funds.

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