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.
👉 Check your currency exposure in Freenance — freenance.io
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