Currency risks affect anyone who invests internationally or conducts business abroad. These risks can have a significant impact on returns due to exchange rate fluctuations. One Well thought-out currency hedging can help you keep your assets more stable. In this article, you will find out when and how hedging is worthwhile and which methods work best.
The Currency risk refers to the risk of losses caused by Exchange rate fluctuations arise when you invest in foreign currencies. As exchange rates are constantly changing, the value of your assets can fluctuate - even if the underlying values do not change. For many investors, but also for SMEs linked to international markets, for example Currency hedging This is crucial for making profits predictable and minimising risks.
There are three main types of currency risk:
Exchange rate fluctuations are often unpredictable and can reduce your returns. For example, a weak USD against the Swiss franc This means that investments in US equities are worth less. In turn, a strong foreign currency can increase your return. It therefore makes sense for many investors to Exchange rate risk and to think about possible safeguards.
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There are various hedging strategies:
For private investors, currency hedging can make sense, but the Costs an important factor. Hedging reduces the risk, but often also reduces potential returns. The decision depends on your Risk tolerance and the size of your portfolio. If you have high assets in foreign currencies a hedge can make perfect sense.
A Forward exchange transaction allows you to convert currencies to a set course to buy or sell at a certain point in time. This protects you against possible exchange rate changes. The interest rate difference between the two currencies and the current spot rate play a role here. Companies often use forward exchange transactions to protect their Invoicing and stabilise payments.
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A good basis for calculation helps, Exchange rate changes and their influence on the Margin reduce the risk of losses. With a targeted currency strategy, companies can optimise their cash flows and reduce the Competition risk lower. This avoids unexpected losses and ensures a secure value in the Home currency secured.
Many SMEs use Forward exchange transactions for long-term planning. A company that buys in USD could, for example, use FX forwards to hedge against fluctuations in the USD/CHF exchange rate. This creates a stable basis for pricing and minimises the risk of unexpected currency losses.
Currency hedging is generally not free of charge. Costs are incurred through Premiums and Surcharges depending on volatility and interest rate differences. In addition, the fees for the Processing depending on Currency pair differ. It is therefore important to analyse the costs and ensure that the benefits outweigh the costs.
Another way to reduce the currency risk is to reduce the currency risk, Investments in various foreign currenciescurrencies. Instead of investing in just one foreign currency such as the US dollar, the investor can also buy shares in euros, pounds sterling or other stable currencies, for example. This diversification reduces the risk of a single currency fluctuation having a major impact on the entire portfolio. Through the distribution across different Currency pairs This allows the exposure to individual currencies to be reduced, which can lead to a more stable performance.
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A Currency hedging offers stability, but can also reduce potential profits. SMES and Private investors with a high foreign currency exposure can benefit, as they can hedge Plan better and minimise risks. Especially with highly competitive markets this can be decisive. However, the costs should be considered and alternatives reviewed.
Hello Eric
I’ve been thinking about hedging more than usual at the moment – especially as the USD and EUR are steadily weakening against the CHF. If you look at the long-term trends for these currencies, neither has ever really recovered… For example, the EUR stood at 1.60 in 2008 compared with 0.92 in 2026 // the USD stood at 1.10 in 2008 compared with 0.80 in 2026.
What makes you feel positive about your approach? Are the costs of hedging greater than the potential loss in value of the currencies? Does this mean that, over the long term, hedging isn’t worth it when selecting ETFs?
Thank you very much for your time. Best regards, Cedric
Hello Cedric
That’s an interesting question. That’s exactly the point I’ve been thinking about more deeply again at the moment.
At first glance, the long-term strength of the CHF does indeed suggest that hedging is a good idea. What has made me cautious so far is that, with a global ETF, you don’t simply hold USD or EUR, but rather stakes in global companies with turnover in many different currencies. Furthermore, hedging incurs ongoing costs and, to my knowledge, historical data does not show any clear, sustained return advantage for hedged equity ETFs.
I’m currently thinking about writing a separate post on this with specific calculations. I’d be particularly interested to see how an MSCI World CHF-hedged index would have performed compared to a standard MSCI World index, as well as a combination of a global ETF and the SPI, over 10, 20 and 30 years. The results might well come as a surprise.
If I do the analysis, I’ll of course share it here on Schwiizerfranke.
Kind regards
Eric
What would be the advantages/disadvantages of a CHF-hedged MSCI World Index compared to the USD variant?
Example 2025: MSCI World +10%, but USD to CHF -10% -> Return: 0%
Hi Brandon, thanks for the interesting question!
Your example shows the problem very well. Here are the most important points:
With the CHF-hedged MSCI World, you are protected against precisely such scenarios and have fewer fluctuations in your portfolio. However, you pay hedging costs (depending on the interest rate differential between CHF and USD) and forgo gains if the USD rises.
With the unhedged variant, you save these costs, and in the long term, currency fluctuations often partially offset each other. In the short term, however, exactly your scenario can materialise: +10 % equity returns, but 0 % in CHF.
My take: In the long term (10+ years), hedging the MSCI World is rather unnecessary for most private investors. The costs eat away part of the return over the years, and currencies fluctuate in both directions. However, if you have a shorter investment horizon or want to sleep more soundly, the CHF-hedged variant may well make sense.
Best regards, Eric