First, the key terms.

Home currency
The currency in which the investor measures the result.
Currency exposure
Sensitivity to changes in currency values through the underlying assets or obligations.

The idea, explained

Always identify the quotation direction. If a foreign currency becomes worth more home-currency units, it can increase the home-currency value of an unhedged investment. The combined return is multiplicative, not simply additive. Currency hedging changes the exposure but introduces cost, implementation and tracking considerations. An investment traded in a home-currency account may still have substantial foreign-currency exposure through its underlying assets.

STEP 1

State the quotation

If one unit of foreign currency is worth fewer home-currency units later, the foreign currency weakened in this quotation. Inverting the quote reverses the numerical direction, so write the units explicitly.

STEP 2

Combine two changes

Calculate asset growth in its own currency, then translate using the exchange-rate change. Multiplication captures their interaction. A fund’s trading currency alone does not establish whether the exposure is hedged.

Follow a worked example.

A foreign asset rises 10 percent in its own currency while that currency falls 5 percent against the investor’s home currency. The combined return is 1.10 × 0.95 − 1 = 4.5 percent, before costs and taxes.

Walk it through, one step at a time

  1. An asset costing 100 foreign units grows 20 percent to 120 foreign units.
  2. One foreign unit initially equals 1 home unit, but later equals 0.90 home units. Final value is 120 × 0.90 = 108 home units.
  3. Home-currency return is 8 percent, before costs and taxes—not 20 percent and not exactly 10 percent.

Where people get stuck

The currency used to display or trade a fund does not necessarily determine its underlying currency risk.

Now try it yourself.

Pause before opening each answer. Explain your reasoning in your own words.

1. Check the core idea

Is a 10 percent asset gain plus a 5 percent currency loss exactly a 5 percent home-currency gain?

Reveal the answer & reasoning

No. Multiplying the return factors gives 4.5 percent in this example. Adding percentages ignores the interaction term.

2. Apply what you learned

Does quoting a foreign-asset fund’s price in Canadian dollars remove currency risk?

Reveal the answer & reasoning

Not necessarily. Underlying exposure and hedging arrangements determine risk; the display or trading unit is not enough.