Foreign Exchange Market
The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.
Currencies can boost returns — but they can also decimate portfolios if their risk is not carefully managed. We discuss why, where and how to hedge currency risk – and outline our approach in taking active foreign exchange (FX) risk.
FX Currencies
Currencies are complicated, and we believe that taking FX risk is not rewarded over the medium to long-term investment horizons of most investors. We generally see FX as a portfolio risk that needs careful assessment and management, rather than as an opportunity to generate additional returns.
Why hedge? With no clear return benefit over time, the key aim for many long-term investors is to reduce volatility. Currency moves can greatly increase the volatility of portfolio holdings. This is particularly the case for low-yielding fixed income assets, as the green bars in the Keeping a lid on volatility chart below show.
