The Hedging Cost of Forgetting the Exchange Rate

Many institutional investors build globally diversified portfolios but often assess risk primarily through the lens of domestic-currency returns. This paper demonstrates why overlooking exchange-rate dynamics can create important blind spots in both portfolio construction and risk management.

Using empirical analysis of major asset classes and historical stress periods, the authors examine how currency movements affect the performance of common hedging and diversification strategies. Their findings show that assets often viewed as defensive, including gold and other traditional hedges, can behave very differently once exchange-rate effects are taken into account.

For CROs, treasurers, pension executives, and asset allocators, the message is clear: foreign-exchange risk is not simply an implementation detail. It is often a first-order determinant of portfolio outcomes during periods of market stress. Ignoring exchange-rate exposures can lead investors to overestimate the effectiveness of hedging strategies and underestimate potential vulnerabilities.

For regulators, central banks, and policymakers, the paper highlights the role of currencies as a key transmission channel through which financial shocks can spread across markets and jurisdictions. The findings reinforce the importance of integrated stress-testing and risk-management frameworks that evaluate market and currency risks jointly rather than in isolation.