Currency movement can put significant strain on your portfolio, using a few simple methods including options and futures, currency risk can be either eliminated or used to increase returns with strategical partial coverage. In a period of great economic uncertainty and G10 currencies swinging multiple percent per day, hedging currency moves will reduce portfolio volatility and help smooth turbulent times.
Currency pair volatility is spiking with the threat of coronavirus to the global economy. There is no time like the present to consider how currency risk is affecting your portfolio and how hedging that risk may increase returns from foreign investment. With the virus creating many value investment opportunities in emerging markets, investors should be wary of the foreign exchange risks involved, and how to mitigate risk using hedging. Historically, investors have hedged FX risks for foreign bond portfolios and left equities exposed; however, given the recent decimation of bond yields and increased volatility in currencies, is this still the best option and what choices do retail investors have when it comes to FX hedging?
An example of the true volatility in FX markets currently can be seen in the Cable rate (pound (GBP) dollar (USD)). A US investor who invested in the UK's FTSE 100 at the beginning of March would have in two weeks lost 25% from the indexes move lower and another 4.3% from the devaluation of the pound. This perfectly shows how exchange rate moves can significantly affect returns.
Source: Investing.com
Why you should pay attention to FX markets
Good portfolio management involves identifying risks to positions and acting to reduce these risks and maximize returns. Investing in a diverse range of international markets is a perfect way to limit portfolio exposure and thus risk to a specific region; however, this move to increase diversification incurs its own potential
