Currency hedging — what is foreign exchange hedging
What is currency hedging? How does protection against exchange rate risk work and when is it worth using.
What is currency hedging?
Currency hedging is a strategy to protect against adverse currency exchange rate changes. If you earn in EUR but spend in PLN — exchange rate changes can help or hurt you. Hedging eliminates this uncertainty.
Who needs currency hedging?
- Freelancers billing in foreign currencies — programmers, copywriters, designers working for foreign clients
- Importers and exporters — companies buying or selling abroad
- Investors — holders of ETFs denominated in USD or EUR
- Planning large foreign currency purchases — e.g., buying property abroad
Currency hedging methods
1. Forward contract
You agree with a bank to exchange currency in the future at a predetermined rate. Regardless of what happens in the market — your rate is locked.
Example: You know you'll receive 5,000 EUR in 3 months. You enter a forward at 4.30 PLN/EUR rate. Regardless of market movements — you get 21,500 PLN.
2. Currency options
You buy the right (not obligation) to exchange currency at a set rate. If the rate improves — you don't use the option. If it worsens — you use it.
Options are more expensive than forwards but provide flexibility.
3. Natural hedging
Matching currencies of income and costs. If you earn in EUR — keep some costs in EUR (foreign currency account, foreign payments).
4. Currency-hedged ETFs
Funds with "EUR hedged" or "PLN hedged" designation eliminate currency risk. You invest in foreign assets, but returns are converted at a hedged rate.
Hedging costs
Hedging isn't free:
- Forward — cost comes from interest rate differences between currencies
- Options — you pay premium (0.5–3% of transaction value)
- Hedged ETFs — higher TER (management fee)
When is hedging worthwhile?
- You have large, predictable foreign currency flows
- Your margin is low and exchange rates could eat into it
- You plan specific foreign currency spending at a specific time
When is hedging unnecessary?
- Long-term investments (10+ years) — currency fluctuations even out
- Small amounts — hedging cost exceeds the risk
- Currency diversification is desired (e.g., protection against PLN weakening)
How Freenance can help
Freenance shows your portfolio's currency exposure — how much assets you hold in PLN, EUR, USD, and other currencies. This helps you make informed decisions about how much and what to hedge.
Want full control over your finances?
Try Freenance for free