Forex hedging – what it is and when it makes sense for Europeans

Hedging means taking a position that offsets a risk you already have. In currencies it has two very different meanings, and only one of them is usually useful to private traders.

#1. Hedging real currency exposure

Suppose you live in the euro area and hold US shares worth $50,000. If the dollar falls 10% against the euro, your portfolio loses about 10% in euro terms even if the shares do not move. You can reduce that risk by:

• Currency-hedged ETFs, which hedge the currency exposure inside the fund (for example "EUR hedged" share classes). Simple and cheap for long-term investors.
• Forwards from a bank – typical for businesses paying suppliers abroad.
• Selling EUR/USD futures or CFDs in the amount of your exposure. Effective, but financing costs and margin make it more practical for shorter periods.
• FX options, which protect against adverse moves while keeping upside, at the cost of a premium. See forex options.

For a Polish, Czech, Hungarian or Swedish investor the same logic applies against both the euro and the dollar. Our guide to currency risk for European investors goes further.

#2. "Hedging" opposite positions on the same pair

Some platforms allow a long and a short position on the same pair at the same time (hedging mode on MetaTrader). The net exposure is zero, so the "hedge" locks in the loss at the moment you open it, while you continue to pay spreads twice and financing on both sides. It can feel like avoiding a loss, but economically it is the same as closing the position.

Offsetting positions across different pairs – for example long EUR/USD and short GBP/USD – is not a hedge but a spread trade on EUR/GBP, with its own risk.

#Hedging and tax

In some European countries, gains and losses on hedging positions are taxed differently from the underlying investment, or cannot be offset against each other. Check with your tax adviser before hedging a large portfolio – our tax overview links to national authorities.

#When hedging makes sense

• You have a real foreign-currency exposure that matters relative to your wealth.
• You understand the cost: spreads, financing, option premiums or the hedging cost inside an ETF.
• You hedge the exposure you have, not a larger amount – over-hedging is speculation.