What is currency hedging?

When you invest in an international asset—such as U.S. stocks or exchange-traded funds (ETFs)—your investment return could be affected not only by fluctuations in the value of the underlying asset itself, but also by fluctuations in the foreign exchange market. 

For example, if you invest in a U.S. equity ETF, your return may be negatively affected if the U.S. dollar falls against the Canadian dollar. This is known as “currency risk” or “foreign exchange risk.” 

Investors could protect themselves against this risk through currency hedging. This involves using sophisticated financial instruments known as futures or options to protect or insulate the investment return from external factors such as currency fluctuations.

Example: “If you buy a Nasdaq 100 ETF in Canada, consider buying the currency-hedged version of this fund, so that your investment won’t suffer if the U.S. dollar falls against the Canadian dollar.”

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• How do the RRSP contribution carry-forward rules work?
• TFSA contribution room calculator

About MoneySense Editors

MoneySense editors and journalists work closely with leading personal finance experts in Canada. Since 1999, our award-winning magazine has helped Canadians navigate money matters.

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