Currency Hedging – Use it or Lose it?
Forecasting movements in foreign exchange markets is notoriously difficult. So what steps should pension plans take to safeguard their assets?
Forecasting changes in foreign exchange (FX) markets is a notoriously challenging endeavour. There are many moving parts, from relative differences in interest rates, inflation and fiscal policy to commodity prices and cross-border capital flows. Predicting any of these individual factors is complex enough in stable market environments and even more so during volatile times.
Currency movements may add substantial uncertainty to returns of globally invested portfolios. In some instances, they may wipe out gains of otherwise solid investment decisions altogether. Exposures can be protected (hedged) – at a price. Therefore, it makes sense to understand which parts of a portfolio should be insulated from FX movements and when.
