Currency hedged definition
Currency hedging, also known as foreign exchange/forex hedging, is the act of entering into a financial contract in order to protect against movements in foreign exchange rates. Financial investors and businesses use hedging like an insurance policy, and tend to use the likes of futures contracts or options to achieve this.
Currency hedging is not a way to make money, but to minimise potential losses. If a fund manager wants to purchase $1 million worth of Canadian bonds, but has a negative view on the future of the Canadian dollar, then they can hedge the currency by investing in something that will move in the opposite direction of the Canadian dollar. This results in any movement in the Canadian dollar producing a net-zero effect – if the current falls 5%, then the hedge gains 5%, and vice-versa.