What is FX hedging?
Setting tomorrow’s rate today.
An asset held in a foreign currency changes in value simply because exchange rates move. To calm that swing, you fix a future rate while you can. Protection, too, has a cost.
In 30 seconds
- An asset held in a foreign currency changes value, in your own currency, when exchange rates move.
- FX hedging calms that swing, for example by fixing today the rate for a future exchange.
- In April 2025, 19% of world foreign exchange trading was outright forwards, as many investors rushed to hedge against a falling dollar.
The same contents, a moving price.
An asset held in a foreign currency changes value through exchange rates alone.
Read deeper
Exchange-rate swings
An asset held in dollars, for example, changes value in your own currency when the rate between the dollar and your currency moves — even if the asset’s own price does not.
Fix the future rate now.
A forward fixes a future exchange rate today.
Read deeper
Forwards and FX swaps
A promise to exchange currencies on a future date at a rate fixed now is an outright forward. An FX swap exchanges now and exchanges back later.
In the Bank for International Settlements’ (BIS) 2025 survey, FX swaps were the most traded instrument at $4 trillion a day, 42% of the total.[1]
April 2025: forwards grew.
Many investors rushed to hedge against a falling dollar.
Share of world foreign exchange trading in outright forwards (April 2025)
15% in 2022. $1.8 trillion a day.
Read deeper
The survey results
According to the BIS, outright forwards traded $1.8 trillion a day in April 2025, 19% of world foreign exchange turnover (15% in 2022).[1]
As the dollar fell, institutional investors and others holding dollar assets sold dollars forward to limit further losses, which pushed trading up.[1][2]
Protection has a price.
Hedging costs money, and gives up the gain if rates move in your favour.
Read deeper
A trade-off
The BIS notes that hedging costs had been high after earlier monetary tightening, and many investors had kept their hedges low.[2]
A hedge calms the swing but costs money, and shrinks the gain if exchange rates move in your favour. See what you give up in return for protection.
A scale for reading the swing.
A scale for reading FX hedging.
Read deeper
Currency mismatch
Which currency the assets you hold are priced in.
Hedged or not
Whether the asset or product dampens exchange-rate swings.[1]
The cost of hedging
How much it costs to dampen them.[2]
This is not advice
This edition explains how FX hedging works. It does not recommend any product or trade.
Next question
NEXT QUESTIONThe largest market in the world has no building.NEXT QUESTIONWhy the world’s currencies speak in dollars.See the Field Notes shelf →What this edition cannot tell you
- Specific hedging cost figures. They change with the currency pair and the interest rate gap.
- Other hedging methods, such as options.