Currency Risk
How FX moves affect returns, hedged vs unhedged, the carry trade simplified
In the twelve months ending May 2015, the MSCI EAFE Index returned approximately negative 0.5% in US dollar terms — unhedged, as most retail investors hold it. The same index, measured in local currencies and then hedged back to USD, returned positive 16.
6% over the identical period. The difference — roughly 17 percentage points of return — came entirely from one source: the US dollar strengthened violently against the euro, yen, and pound during that year as the Fed signaled rate hikes while the ECB and Bank of Japan were easing. The underlying businesses performed well.
Local stock markets rose. But for an American investor, the currency translation erased all gains and then some. This is not an edge case — it is the single largest short-term risk factor in international investing, and most retail investors do not know it exists.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1The FX translation formula — your real international return
- 2The 2014-2015 currency headwind — same stocks, drastically different returns
- 3Currency Erosion Simulator
- 4Hedged vs unhedged — when each approach wins
- 5The carry trade — the simplest FX strategy and its blow-up risk
- 6When the dollar helps vs hurts international returns
- 7Where to see this on the platform