Illustrate how currency forwards, futures and swaps alter the risk and return of a portfolio
The idea
An investor with foreign assets hedges by selling the foreign currency forward, fixing the rate at which value converts home. Covered interest parity sets the forward price, so hedging a currency whose interest rates exceed the base currency's gives up that yield gap, while hedging a lower-yielding one earns it. Futures do the same job with standard sizes, daily margining and clearing; forwards fit exact amounts and dates. A currency swap exchanges principal at the start and end, with interest in each currency in between, turning foreign-currency borrowing or assets into domestic ones. The trap is that a forward hedges a fixed amount while the asset's value keeps changing, so the hedge ratio drifts and needs rebalancing.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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