QUESTION: Currency risk: currency hedging — when does it make sense?

Hedging currency risks using specialized financial instruments does not always make sense, but only under certain conditions. Before deciding to protect your portfolio, it is useful to carefully calculate the baseline scenario of market development and a stress scenario with a sharp drop in the national currency exchange rate. Always build in a time and financial buffer of 10–20 percent so that excessive insurance costs do not eat into the potential returns of your investments.

Decide in advance which specific expenses or regular contributions you are ready to cut first if hedging costs turn out to be too high. The use of futures, options, or other derivative financial instruments is justified for large portfolios when an investor cannot simply sell risky assets due to tax consequences or infrastructure restrictions. If the investment horizon is less than a year and the currency position is small, the costs of maintaining a hedge may exceed the benefit of the protection itself.