How can I hedge currency risk when investing internationally?

Currency risk can significantly impact returns when investing in international markets. To protect your portfolio, investors use strategies like currency hedging, diversification, and investing in hedged assets.

1. Use Currency-Hedged Funds

One of the simplest ways to reduce currency risk is by investing in currency-hedged ETFs and mutual funds. These funds use financial instruments to minimize the impact of currency fluctuations.

For example, if you are investing in U.S. stocks but want to protect against fluctuations in the Indian Rupee (INR) and U.S. Dollar (USD), a hedged fund automatically adjusts for currency risks.

2. Diversify Your International Investments

Investing in multiple countries reduces reliance on any single currency. By diversifying across regions, you spread the risk of currency fluctuations.

• Invest in multiple currencies: Holding stocks and assets in different currencies reduces overall exposure to a single currency’s volatility.
• Include emerging and developed markets: Different markets react differently to currency changes, balancing your risk.

3. Use Forward Contracts and Options

Forward contracts and options allow investors to lock in exchange rates for future transactions, reducing currency risk.

For example, if you expect the USD to appreciate against the INR, you can enter a forward contract to secure today’s exchange rate for a future date.

• Forward Contracts: Agreements to buy or sell a currency at a predetermined rate.
• Options: Provides the right (but not the obligation) to exchange currency at a set rate in the future.

4. Hold Foreign Currency Deposits

Keeping a portion of your portfolio in foreign currency deposits helps offset currency fluctuations.

For example, if you frequently invest in the U.S., having a USD bank account allows you to reduce the risk of INR depreciation against the dollar.

5. Invest in Strong Global Companies

Global corporations that generate revenue in multiple currencies naturally hedge against currency fluctuations.

For example, companies like Apple, Microsoft, and Unilever operate globally, reducing exposure to a single currency’s volatility.

• Look for companies with diversified revenue streams.
• Invest in multinational stocks or global ETFs.