The reference Interest Rate for the Canadian Dollar currency, according to the latest updates from November 2024, stands at 3.75%. The rate is set by the Bank of Canada (BoC).
We also calculate the cumulative hedging costs over different periods, from 6 months to 30 years, and provide a comparison with unhedged returns. This offers a clear view of how hedging impacts performance over time, helping investors assess its potential benefits or drawbacks.
Hedging a currency with a higher reference interest rate than the one being hedged results in a cost.
Conversely, if the reference interest rate is lower, the hedging cost is negative, effectively providing an extra return for the investor.
Hedging against - Current Annualized Hedging Cost (%) |
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|---|---|---|---|---|---|---|
| USD | EUR | GBP | JPY | AUD | ||
| Hedged Currency | CAD | 0.96% | -0.34% | 0.96% | -3.37% | 0.58% |
| Reference Interest Rate | 3.75% | 4.75% | 3.40% | 4.75% | 0.25% | 4.35% |
CAD Hedging vs Unhedging
The table below provides a comparison of CAD-Hedged and Unhedged investment returns.
It highlights how currency fluctuations impact overall performance when investing in foreign assets, over the latest periods.
Hedging is not always convenient. Hedging operations, such as forward contracts, options, or swaps, incur operational costs that can eat into potential profits. It’s important to weigh these costs against the expected benefits of reducing currency risk. In some cases, it may be more advantageous to accept the currency risk rather than bear the fixed costs of hedging.
The displayed returns show the difference in performance resulting solely from the currency effect, whether the investment was hedged or unhedged. Data are updated to October 2024.
| Investing in | Strategy | Cumulative Return Variation (%), due to currency effect |
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|---|---|---|---|---|---|---|---|---|---|
| 6M | 1Y | 3Y | 5Y | 10Y | 20Y | 30Y | Detail | ||
| USD | CAD-Hedged | -0.42% | -0.65% | -0.99% | -0.99% | -1.91% | 0.47% | 0.84% | |
| Unhedged (USD/CAD) | 1.77% | 0.25% | 12.28% | 5.69% | 23.46% | 14.19% | 2.77% | ||
| EUR | CAD-Hedged | 0.20% | 0.44% | 2.56% | 3.58% | 8.68% | 10.17% | 13.78% | |
| Unhedged (EUR/CAD) | 3.13% | 2.93% | 5.46% | 2.94% | 7.05% | -3.01% | -11.98% | ||
| GBP | CAD-Hedged | -0.32% | -0.44% | 0.10% | 0.68% | 3.08% | -0.73% | -12.32% | |
| Unhedged (GBP/CAD) | 5.00% | 6.91% | 6.28% | 5.85% | 0.03% | -19.48% | -18.59% | ||
| JPY | CAD-Hedged | 2.10% | 4.65% | 11.23% | 12.57% | 18.50% | 41.39% | 106.39% | |
| Unhedged (JPY/CAD) | 3.83% | -0.76% | -16.45% | -25.48% | -9.50% | -21.15% | -34.95% | ||
| AUD | CAD-Hedged | 0.05% | 0.36% | 1.86% | 2.33% | -1.05% | -23.54% | -32.99% | |
| Unhedged (AUD/CAD) | 1.93% | 3.99% | -1.88% | 0.78% | -7.72% | 0.24% | -9.07% | ||
There is no general rule that can definitively determine in advance whether hedging is advantageous, as the decision to hedge currency risk depends on a range of subjective and market factors. Each situation is unique, and the benefits of hedging must be evaluated on a case-by-case basis, considering various elements.
