Hedging is regarded as an advanced investing strategy, but its principle is rather simple. Whether in your portfolio or your business, hedging is all about lessening or relocating risk. It is a great strategy that can protect your portfolio, home and business and uncertainty. This article further explains how hedging can protect your investment.
Long-Term Risk Negation
Imagine a scenario of a trader having a U.K.-denominated fund. Owning companies that show satisfactory performance is your investment target. Depending on economic and political variables, the exchange rate of the dollar and the pound will change over time. With these considered, it is necessary to hedge your currency risk to benefit from owning your fund over the long term.
Foreign Stocks add Diversity to Portfolios
Traders may want to own companies in foreign countries in order to diversify their portfolio. For example, for those investors who seek to take more risk and get higher gains, emerging markets are a very attractive investment opportunity. In that case, they can reduce their risk exposure using currency-hedged ETFs and mutual funds.
A forward contract allows the buyer to lock in the price they pay for a currency. That means the exchange rate is locked in place for a certain amount of time.
Hedging Big Declines in Currency
If ever there is a sudden drop in the value of a currency, a hedging strategy can protect investors from such things. Political and economic factors can play a part in the movement of exchange rates and sometimes, of the rate of currency can be extremely volatile. A hedged portfolio may cost an investor but it can protect investments when the value of currency suddenly drops.