Good afternoon,
In this context of inflation and FED rates increase, what is your strategy for currency hedging?
Is it worth it?
Thank you!
Use currency hedging for bonds but don’t use currency hedging for equity. That’s the usual advice independent of inflation.
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Buy shares of international companies that have global sales in multiple countries. That way I have a natural hedge to the currencies of those countries
Do you have a source for that?
Interest rate parity theory as I understand it on a basic level would say that if you invest in a USD denominated bond with higher interest rate than a bond with equivalent risk profile denominated in CHF, all other things being equal the FX rate will change over time so that you earn the same return as the CHF bond.
If you are able to predict macroeconomics changes better than the market then there is an arbitrage opportunity to buy futures (hedge) and make profits (carry trade). But as an individual investor you are competing against professional FX and bond traders
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Yes, that would be the market expectation in the long term. However, currency exchange rates can be fairly volatile in the short term. See e.g. USD appreciating against CHF beginning of April until mid-May despite higher interest rates.
The main motivation for having a mixed stock/bond portfolio (instead of 100% stocks) is to reduce overall portfolio volatility, as measured in the local currency. As far as I know, local bonds and hedged foreign bonds fulfill that purpose better than unhedged foreign bonds.
This Vanguard resarch paper may be interesting: Going global with bonds. I might have read this a while ago but have only skimmed it right now.
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