The issue of exchange rate risk is often overlooked by those who want to invest in the stock market. And yet, it is a crucial point for achieving performance on foreign stock markets, via lively securities from the best securities accounts or even from the best PEA via eligible ETFs. This year is a good example, with the US dollar falling by -17% against the euro between January and September 2025. During the same period, the S&P 500 recorded a performance of +12.5%, respectable certainly, but not enough to compensate for the loss on exchange rates.
In this article, let’s discover what exchange rate risk is, what its consequences are for an investor, and how to hedge against exchange rate risk. We will also look at a concrete case of hedging exchange rate risk with an example on the EUR/USD, before returning to the advantages and limitations of hedging against exchange rate risk with financial products such as the turbo for the individual investor. Finally, find all our tips for avoiding exchange rate risk.
What is exchange rate risk?
Foreign exchange risk is the risk of capital loss, or reduced earnings, associated with currency fluctuations. Foreign exchange risk is often referred to as currency risk for companies that do business internationally, and are therefore exposed to the risk that sales results in a foreign currency compared to production costs in the local currency could generate a deficit in the company’s balance sheet, for example.
Currency risk also applies to investors who purchase shares of foreign companies and ETFs providing diversified geographic exposure or geographic exposure outside the eurozone. In this case, currency risk will impact the performance of investments made abroad, and even if a share shows an increase of +8% on the stock market over a year, the final performance may be lower after deducting the exchange rate changes over the past year.
How much can an investor lose due to currency risk?
What a French investor can lose from currency risk will primarily depend on the currency of the country in which they are investing. Thus, the more volatile the foreign currency, the greater the currency risk. For example, the volatility of the euro against the dollar is significantly lower than that of the euro against the Turkish lira.
Nevertheless, the value of the euro against the US dollar still fell by 38% between 2008 and 2022. This is sufficient volatility to significantly impact (in this case pos, positively for the French investor) the performance of an investment in the American markets. Between September 2022 and July 2023, however, the US dollar fell by 18% against the euro, which could have negatively impacted the performance of an investment in USD for French investors. The same thing happened in 2025, as the USD fell by -17% against the euro, very negatively impacting all investments in US dollars (S&P500, Nasdaq, SCI World, etc.).
Another example: since 2023, the euro’s exchange rate against the en has increased by +26%. During the same period, the Nikkei index recorded a performance of +50%, which means that for a European investor, the performance will be only +11% (instead of +50%), a significant shortfall.
These examples, however, are not comparable to the fall in the value of the Turkish lira, which went from 6 to 35 against 1 euro between 2019 and 2024.
The loss will therefore always be proportional to the amount of the investment. We can highlight several scenarios and examples with the variation of an exchange rate that reaches 10%:
- The exchange rate is unfavorable (-10%) and reduces the asset’s performance: an increase of +20% becomes approximately +8%.
- The exchange rate is unfavorable (-10%) and can completely cancel out the performance: an increase of +10% becomes approximately –1%.
- The exchange rate is unfavorable (-10%) and can turn a gain into a loss: an increase of +5% becomes approximately –5.5%.
- The exchange rate is favorable (+10%) and amplifies the performance: an increase of +20% becomes approximately +32%.
- The exchange rate is favorable (+10%) and can almost erase a loss: a drop of -10% becomes about -1%.
- The exchange rate is favorable (+10%) and can turn a loss into a gain: a drop of -5% becomes approximately +4.5%.
If this observation is true for investments in stocks, it is even more true for investments in bonds. Some companies, even French ones, issue bonds offering excellent returns, but in foreign currencies (GBP, AUD, CHF, JPY, ZAR). They do this to finance their international activities, and precisely to avoid exchange rate risk. To benefit from the double-digit returns offered by these bonds, you must be prepared to assume the exchange rate risk or hedge it.
How to hedge against exchange rate risk?
The first thing to do before hedging against currency risk is to try to assess it as best as possible. If you plan to buy 10 McDonald’s shares, worth $300 each, the currency risk will be easy to calculate. If your stock portfolio includes several US stocks, it won’t be too difficult to add up the amounts by taking into account all the US stocks in your portfolio.
Things can get more complicated if you’ve invested in an MSCI World ETF, for example. You’ll then need to look at the ETF’s exposure details and calculate your exposure to each currency.
Choose full or partial coverage.
Once you have determined your exposure to foreign exchange risk for each currency, you will need to determine whether you want to hedge all the exchange rates to which you are exposed, in which case this would be a full hedge. However, you could also analyze the EUR/USD, EUR/JPY, and EUR/GBP rates, then estimate that the risk of loss on the EUR/GBP is not sufficient to make hedging relevant, and even conclude that the exchange rate will be in your favor on the EUR/JPY. Choosing to hedge only on the EUR/USD would therefore be a partial hedge.
An investor could also choose to hedge all foreign currencies, but only for a portion of the total exposure. This decision could be motivated by the reduction in hedging costs. We will see later that currency hedging has a cost, and that it may be appropriate to hedge only half the risk if significant savings are made on setting up the hedge.
In any case, the decision should not be taken lightly, and should be subject to an analysis as rigorous as that which an investor would have carried out to validate their investment decision on the shares of the foreign companies he has chosen.
Determine the duration of coverage.
As we mentioned earlier, hedging currency risk also represents a cost for the investor. The duration of the hedge will be an important parameter in assessing its cost. The longer the duration, the higher the cost.
It may therefore be relevant as part of its analysis of exchange rate risk to assess what the best timing will be to set up an exchange rate hedge.
Based on, for example, basic technical analysis, an investor may choose to wait for a currency’s price to break out of a trading range before hedging currency risk. Indeed, the risk of seeing high volatility in a currency’s price moving within a trading range will be lower than in a trending market context.
In conclusion, it will be necessary as far as possible to determine the times when the exchange rate risk is greatest focus hedging efforts during these times.
Practical case of hedging the euro-dollar exchange rate risk
Here is a practical case of hedging currency risk with a turbo for a French investor buying US shares.
Let’s say you bought 20 Nvidia shares for a total of USD 3,600 (or €3,060, at a rate of EUR/USD 1.175). If the EUR/USD rate rose to 1.45, your investment of USD 3,600 would be worth only €2,480, a loss of 19%. For this example, we’ll assume that the most likely scenario, given the euro’s relatively low value compared to recent years, is a rise in the euro-dollar exchange rate.
So you’d need to hedge the position with a turbo to prevent €580 or more from going up in smoke. For example, consider a turbo whose underlying value is €100 and costs €10 (10x leverage).
To hedge 3,060 euros, we would need to purchase 31 turbochargers of this type for a total cost of 310 euros. The hedging transaction would be profitable in this case since we would have paid only 310 euros to hedge a risk of 580 euros.
However, if the estimated risk was only a rise in the EUR/USD to 1.25 (and therefore a risk of loss of 180 euros), then implementing the risk hedge would not be relevant.
In this example, it is also possible to only partially hedge the currency risk by relying on a hedge of 50% of the total investment. In this case, the hedge would only cost €155. It will always be possible to increase the hedge amount if the currency risk increases.
What are the advantages and disadvantages of hedging foreign exchange risk?
Mastering foreign exchange risk hedging is a profession in its own right in banks and investment funds, so there are advantages and disadvantages to wanting to implement this type of strategy when you are a private investor.
What are the advantages of hedging currency risk with a turbo?
The advantage is to optimize your performance and avoid losses that are independent of our good investment decisions on stocks on the stock market. By using turbos, we also benefit from the leverage effect possible thanks to these stock market products, which means that we need to immobilize less capital to cover a greater risk.
Like other leveraged products, hedging with turbos only exposes the investor to a loss limited to the amount of the premium, whereas other leveraged products could expose an investor to much greater losses.
Since it is possible to calculate the amount of exchange rate risk and know in advance the cost of a turbo, it will be relatively easy to measure the benefit of implementing a hedging strategy with turbos.
What are the disadvantages of hedging currency risk with a turbo?
The main disadvantage of implementing a currency hedging strategy with turbos is the cost of purchasing the turbos, which is necessary to execute the hedging strategy. It will be necessary to ensure that the cost of implementing the hedging strategy does not exceed the maximum risk amount that one is seeking to neutralize.
The second drawback is that if it is a currency risk, it is also possible that the scenario against which we are seeking to protect ourselves does not materialize as we had anticipated. It is then the hedging strategy that would reduce performance or generate a loss.
How to avoid exchange rate risk without hedging?
Hedging currency risk is complex. It requires specific tools and can quickly become costly for an individual investor to manage. This is why it may be wise to explore solutions to avoid currency risk without having to hedge your own risk. Here are some solutions, easily accessible with the best stockbrokers, which we detail below.
Hedged ETFs
For European investors, so-called “EUR hedged” ETFs are probably the simplest solution for avoiding currency risk, the easiest to manage,a nd the least expensive way to gain exposure to American or international markets without incurring currency risk.
By automatically integrating a hedge on the euro, these hedge ETFs allow you to focus on the performance of the underlying assets without having to manage complex hedging instruments yourself and without depending on currency fluctuations.
Currency overlay funds
Investors can also opt for traditional UCITS-type funds that incorporate a currency overlay mechanism. Specifically, these funds often offer several share classes: an unhedged version and a hedged version, for example, in euros. The manager then uses financial instruments such as futures contracts or swaps to automatically adjust the hedge between the asset’s currency and the investor’s currency.
This solution, integrated into the fund itself, makes it possible to avoid managing exchange rate risk while remaining within a regulated and transparent framework, with fees generally slightly higher than those of a traditional fund, but quite competitive in relation to the service provided.
Structured products with integrated currency hedging
There are also structured products that directly incorporate currency risk hedging. These instruments, often issued by banks, provide exposure to the performance of an index or basket of foreign stocks while neutralizing the effect of currency fluctuations. In practice, the issuer implements the hedge within the structured product itself, so that the investor receives returns in euros, regardless of exchange rate fluctuations.
These structured products also frequently offer partial or total guarantees of the invested capital, and sometimes even a guaranteed minimum return, which can appeal to savers seeking security. On the other hand, structured products often have higher fees than ETFs or traditional funds and expose them to counterparty risk, linked to the financial strength of the issuer.
US stocks listed in euros on European stock exchanges
Be careful with US stocks listed in euros on Euronext or Xetra: if your securities account is in EUR, buying the line denominated in euros certainly saves you a conversion and therefore immediate exchange fees, but it does not eliminate the exchange rate risk. Indeed, the price in euros constantly replicates the USD price multiplied by the EUR/USD rate, and there is no built-in hedging: your performance therefore remains sensitive to currency movements.
For example,a t the end of September 2025, Tesla is at around +10% YTD in USD (TSLA line), while its Euro line on Xetra (TL0) is at around –9.6% YTD, with the difference coming from exchange rate variations over the period. In other words, US stocks listed in Euros reduce exchange rate costs, but not exchange rate exposure and risk.
The natural cover technique
Some investors seek to limit their exposure to currency risk by favoring companies with a highly international business, with revenues denominated in euros and other currencies. This approach, called “natural hedging,” is based on the idea that the geographic diversification of the company’s revenues partially offsets the effect of currency fluctuations. In practice, this strategy is difficult to implement and, above all, complex to measure: it is rare for a company to publish data that allows for a precise assessment of its exposure to different currencies. It is therefore not the most reliable method for protecting against currency risk. However, it has the advantage of being the least expensive, since it simply involves adapting the choice of shares based on the international profile of their revenues.
