Currency Hedging: What Forward Points Cost, Hedged vs Unhedged International Funds, and How Businesses Hedge

Currency hedging has two audiences. Investors who own foreign stocks or bonds decide whether to keep the exchange rate in their return. Companies with foreign sales or costs decide how much of a known cash flow to lock. The tool, a forward contract, is the same, and its price comes from the same place: the gap between two interest rates.

This guide shows how to compute a forward price, uses it to compare what hedging costs a US-dollar investor and a yen-based investor, reviews iShares data on hedged and unhedged international funds, and sets out the basic business choices and the accounting rules that apply. Rates and prices are as of late September 2026.

Where the forward price comes from

A forward contract fixes today the rate for an exchange on a later date. Its price follows from covered interest parity, which says the forward rate has to make the two ways of moving money equal. Lending dollars at the dollar rate, or converting to euros, lending at the euro rate, and locking the conversion back with a forward, must give the same result. If they did not, someone could earn a riskless profit.

For EUR/USD, quoted as dollars per euro, the three-month forward is spot times (1 + dollar rate x days/360) divided by (1 + euro rate x days/360). Illustration: the inputs below are policy rates, used as simple proxies for money-market rates.

Illustration: forward rates from those inputs.

Read the table as pricing, not prediction. The euro trades at a forward premium because euro rates are below dollar rates, and the yen trades at a larger one because Japanese rates are lower still. Selling the euro forward at 1.1439 is not a bet that the euro will be worth 1.1439 in three months. Real quotes will differ by the cross-currency basis, the bank's margin, and the difference between policy rates and the market rates dealers actually use, so ask for a live quote before you decide.

What hedging earns or costs, by home currency

Hedging swaps the exchange-rate move for the interest rate difference. Which way that difference points depends on where you live.

Illustration for a yen-based investor who owns a US-dollar asset expecting 7% in dollars. Hedged into yen, the expected return is about (1.07 x 1.0125 / 1.03875) - 1, or 4.3%. Unhedged, a 10% drop in USD/JPY turns the same asset into a yen loss of 3.7%, and a 10% rise makes it a gain of 17.7%. On a one-million-dollar position, the 12-month forward in the earlier table sells dollars at 153.15 against spot 157.18, a hedge cost of about 4.03 million yen, or 2.56%.

The same numbers help a US investor. A 7% local-currency return on a Japanese asset becomes roughly 9.8% in dollars once hedged, at these rates. The catch is that the carry can change: rates move, and a hedge that earns money today can cost money after the next central bank meeting. The BOJ said on September 18, 2026 that it will continue to raise its policy rate, and the ECB raised its rates in June and September, so the gaps against the dollar will narrow if the Fed holds.

Hedged and unhedged international funds

iShares publishes fact sheets for two funds that hold the same stocks: EFA, which follows the MSCI EAFE Index (Net), and HEFA, which follows the MSCI EAFE 100% Hedged to USD index and holds EFA plus currency forwards. Data below are from the fact sheets as of June 30, 2026, NAV returns.

Compounding the calendar-year figures, $100,000 invested at the start of 2021 became about $152,990 in EFA and $191,980 in HEFA by the end of 2025. The gap follows the dollar. Hedging helped in 2021, 2022, and 2024, consistent with a stronger dollar, and hurt in 2025, consistent with a weaker one. We did not split the gap between carry and exchange-rate moves. The five-year lead reflects the dollar's path over those years and is not a durable edge for either fund.

The lower standard deviation for HEFA shows what the hedge does: it removes the currency volatility, which the unhedged fund includes. Hedged fund fees deserve a look. HEFA's fact sheet shows an expense ratio of 0.70% before a 0.35% fee waiver, so read the prospectus to see whether the waiver is scheduled to expire.

How to decide: hedge more when the money will be spent in dollars soon, when the foreign holding is bonds (whose returns are small compared with currency swings), or when you cannot stomach the currency volatility. Equity investors with a long horizon can reasonably leave more unhedged: the difference between the two funds' three-year standard deviations, 12.82% and 8.62%, is what currency adds. A person whose future spending is in another currency has a different answer; the hedge should match the currency of the liability. Our stagflation guide covers other inflation-related choices.

Business hedging basics

Companies face three kinds of currency exposure. Transaction exposure is a known payable or receivable in another currency. Translation exposure comes from consolidating a foreign subsidiary's statements into the reporting currency. Economic exposure is the effect of lasting exchange-rate shifts on competitiveness and future revenue. Forwards and options mostly address the first; the other two call for pricing, sourcing, and financing decisions.

Forwards, options, and collars

Illustration: a US company expects to receive €5,000,000 in 91 days. At spot (1.1400) that is $5,700,000. It sells the euros forward at 1.1439 and locks $5,719,687, which is $19,687 more because of the forward premium.

The forward removes the risk and the gain. An option keeps the gain and costs a premium. With an assumed volatility of 8% (our assumption, not a market quote), a three-month euro put struck at the forward costs about 1.58% of the notional, or $90,321 on €5 million, and at 6% and 10% volatility 1.19% and 1.98%. A cheaper put struck 5% below the forward, at 1.0867, costs about 0.18%, but leaves the first 5% of adverse movement unhedged. A zero-cost collar buys that 1.0867 put and sells a euro call struck near 1.2053 (5.4% above the forward), which caps the gain at about that level. Use an option or collar when the cash flow is not certain, such as a bid that may not be won, because a forward that is no longer needed remains an obligation that has to be settled or closed at the market rate.

Layering and natural hedges

Many companies hedge in layers, taking cover on part of a forecast exposure and adding more as the date nears and certainty rises, and they keep a written policy on the maximum share to hedge, the instruments allowed, and who approves exceptions. The percentages are a policy choice, not a rule. The main risk of over-hedging is that if forecast sales fall short, the forward remains open, and the company is speculating on the difference.

Natural hedges reduce the amount to hedge. They include matching foreign revenue with costs in the same currency, borrowing in the currency of foreign assets, netting payables against receivables across subsidiaries, and invoicing in the home currency (which moves the risk to the customer, who may respond in the price). Each has trade-offs, such as supplier concentration or customer resistance. Our cash flow management guide and business debt guide cover the financing side.

The market behind these tools is huge. The Bank for International Settlements' 2025 Triennial Survey put global foreign exchange turnover at $9.6 trillion a day in April 2025, up 28% from 2022. In its turnover tables, FX swaps were 42% of turnover ($4 trillion a day), spot 31% ($3 trillion), and outright forwards 19% ($1.8 trillion). The dollar was on one side of 89.2% of trades.

ASC 815 hedge accounting at a high level

Under US GAAP, derivatives are measured at fair value with changes in earnings unless hedge accounting applies. A forward that hedges a forecast sale would otherwise move earnings before the sale happens, adding volatility that the hedge was meant to remove. ASC 815 lets a company match the timing if it meets the conditions.

• There are three types: fair value hedges of recognized items or firm commitments, cash flow hedges of forecast transactions, and hedges of a net investment in a foreign operation.
• The company must document the hedge relationship, the risk, and how effectiveness will be assessed at inception.
• For cash flow and net investment hedges, changes in the value of the instrument included in the effectiveness assessment are deferred in other comprehensive income and recognized in earnings when the hedged item affects earnings.
• ASU 2017-12 eliminated the separate measurement and reporting of ineffectiveness, required the derivative's result to appear in the same income statement line as the hedged item, allowed qualitative effectiveness assessments after the first one under conditions, and gave more time for the initial quantitative test. It also allows the critical terms match method for a group of forecast transactions occurring in the same 31-day period or fiscal month.
• Private companies that are not financial institutions get extra relief on the timing of documentation and testing.

Hedge accounting is optional. A forward that offsets a recognized foreign-currency receivable often produces offsetting earnings entries without it, since the receivable is remeasured through earnings. Whether to elect it, and how to document it, is a decision for the controller and auditors; this section is a map, not accounting advice.

A short process

1. List exposures by currency, amount, and date, and separate the certain from the forecast.
2. Get live forward and option quotes and compare them with the parity calculation above. A large gap is worth questioning.
3. Decide the hedge share and instrument for each layer in writing.
4. For investment portfolios, match the hedge to the currency of future spending, and read the fund's fees, its waiver terms, and how it rolls forwards.
5. Recheck each quarter, since rate differentials and exposures change.

This guide is for informational purposes only and is not investment, tax, legal, or accounting advice. Forward and option prices in the illustrations are calculated from policy rates and an assumed volatility and will differ from live quotes. Fund data are from iShares fact sheets as of June 30, 2026. Currency contracts involve counterparty and market risk. Consult a qualified treasurer, adviser, or accountant before hedging.