Currency Hedging

A tool used to protect against the risks posed by worldwide currency fluctuations. If fund managers think the dollar is going to be stronger when they are ready to change the foreign currency back into U.S. dollars, then they take out a foreign futures contract (a hedge). Thus, they lock in the exchange rate beforehand, so that they will not lose profits gained from holding devalued foreign currency. If the manager thinks the dollar will weaken against foreign currencies, there's no real reason to hedge. In fact, if the manager guesses correctly, he'll boost the fund's overall return because the profits will be worth even more when they are exchanged into U.S. dollars.



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