Currency hedging

What it means

Using forwards, futures or options to reduce a portfolio’s exposure to exchange rate movements on foreign assets.

The exam angle

The hedge ratio is a deliberate choice, not a binary. Hedging cost is driven by the interest rate differential, not by any view on the currency.

Where it appears in the syllabus

• Derivatives & Risk ManagementCFA Level III · exam weight 10–15% · Options strategies, swaps/forwards/futures strategies, currency management.
• Asset AllocationCFA Level III · exam weight 15–20% · Capital market expectations, allocation principles, real-world constraints.
• EconomicsCFA Level II · exam weight 5–10% · Two dense modules: currency equilibrium value and economic growth.

Related terms

• CollarHolding the underlying, buying a put and writing a call, bounding the outcome between a floor and a cap.
• Covered callHolding the underlying and writing a call against it, collecting the premium in exchange for capping the upside.
• Derivatives overlayAdjusting a portfolio’s exposures with derivatives while leaving the underlying holdings untouched.
• Protective putHolding the underlying and buying a put, which sets a floor under the position at the cost of the premium.
• StraddleBuying a call and a put at the same strike and expiry — a position on the size of a move rather than its direction.
• Carry tradeBorrowing in a low interest rate currency to invest in a high interest rate one, profiting if the exchange rate does…