Currency hedging is a method used by companies and investors to reduce the impact of currency fluctuations on their investments. It is a way to minimize or eliminate foreign exchange risk by setting up a related currency investment designed to offset changes in the value of the currency. Currency hedging is similar to insurance, which you buy to protect yourself from an unforeseen event. Here are some key points about currency hedging:

• Purpose: To reduce the effects of currency fluctuations on investment performance.
• Methods: Two common hedges are forward contracts and options. A forward contract is an agreement to exchange a fixed amount of currency at a future date and specified rate. An option gives the holder the right, but not the obligation, to exchange one currency for another at a set rate for a certain period of time.
• Benefits: Currency hedging reduces the increase or decrease in the value of an investment due to changes in the exchange rate. It aims to even out results and protect against losses.
• Considerations: Investors shouldn’t make long-term investment decisions based on expectations of future foreign currency movements. There are a number of important factors to consider when evaluating if currency hedging is right for you, including time horizon, investment goals, and market outlook.

Currency hedging can be done through currency swaps, forward contracts, and options. Many currency-hedged ETFs and mutual funds now exist to give investors access to foreign investments without worrying about currency risk. The objective of currency hedging is to reduce currency risk and accept the additional cost of buying a forward contract.