Understanding currency risk and currency hedging

Claymore Investments, Inc. 15 May, 2010 | 4:59AM

One of the major additional risk considerations for global investing is the currency risk associated with the portfolio. When investing in global products, investors are buying securities domiciled in foreign currencies, and the fluctuations of these currencies can have an impact on a portfolio's performance.

For example, a Canadian investor can buy a Canadian-listed ETF that trades in Canadian dollars but that tracks a basket of global stocks. The portfolio's returns will then be made up of two parts: the returns from the basket of underlying stocks, plus or minus the returns from the currency exposure of the underlying stocks relative to the Canadian dollar.

More specifically, if the stocks return 10% but the Canadian dollar rises 4%, the investors will only return approximately 6% because the Canadian dollar appreciation will hurt the value of the stocks back in Canadian dollars. If the Canadian dollar drops 4%, the investor would benefit from the appreciation of the global currency against the Canadian dollar and earn 14% on that investment.

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Claymore Investments, Inc.

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