What is currency risk and how can you hedge it?
Stocks and bonds can be listed in different currencies. For example, shares in the U.S. Dow Jones Index are quoted in dollars and Japanese shares are quoted in yen. When you invest in stocks or bonds with a currency other than the euro, you run currency risk. This is because exchange rates between currencies are constantly changing.
This means that a decrease in the foreign currency means that you get back fewer euros after selling your investments. Conversely, if the foreign currency rises, you get more. So you actually run double risk: the risk of the shares/bonds themselves and the currency risk.
Hedging currency risk
We don't like unnecessary risk. This caution is also reflected in our investment strategy, where we give you as many options as possible to deal smartly with investment risks. For example, in your account you can choose between a fund with currency risk hedging (hedged) and a fund without (unhedged).
Hedged versus unhedged funds
With hedged funds, currency risk is hedged. For example, these are funds that contain stocks from around the world, quoted in dollars, yen and euros. Normally, you would incur currency risk with such investments.
Because the currency risk is hedged in a hedged fund, you are not affected by currency fluctuations. For example, if the dollar falls sharply against the euro, you won't notice this in a hedged fund, since many global stocks are quoted in dollars.
With an unhedged fund, the currency risk is not hedged. That means you do feel the impact if the dollar suddenly loses a lot of value against the euro. But this risk can also work in your favor. If the dollar rises in value against the euro, you benefit if you invest in a fund that consists largely of dollar-denominated stocks.