Hedging of foreign investments
Hedging of foreign investments is in many ways similar to normal commercial hedging. In both cases, the currency exposure is an often unwanted additional exposure aside from the underlying investment or commercial activity.
Of course, an investment in a particular foreign stock may also be an investment in the expectation of an appreciating currency, but in most cases this will not be the primary reason.
The interest rate differentials may often be an important consideration when entering a longer term hedge and may sometimes also represent a significant advantage when this differential is positive. Just like in commercial hedging, the lack of expertise and commitment from many banks leads to investors either ignoring these exposures or failing to capitalise on some of the potential benefits associated with the exposures.
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07-23-2008, 09:30 PM
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