What is currency risk in global funds?

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Multiple Choice

What is currency risk in global funds?

Currency risk in global funds comes from the fact that assets held outside Canada are priced in foreign currencies. When those currencies move relative to the Canadian dollar, the value of the fund’s non-CAD assets in CAD terms changes, affecting returns. This risk is present even if a fund is global, because foreign currency fluctuations can add or subtract from performance measured in CAD. Hedging is the tool used to control this risk. It can reduce uncertainty by locking in exchange rates, but it also adds costs and can cause tracking error if the hedge doesn’t perfectly match the fund’s exposure. So currency risk exists and hedging can either mitigate it or introduce additional costs. The other statements aren’t correct because currency risk is not limited to domestic funds, it does matter for global funds, and currency movements do not guarantee higher returns—there can be losses if movements go the wrong way or if hedging costs erode gains.

Currency risk in global funds comes from the fact that assets held outside Canada are priced in foreign currencies. When those currencies move relative to the Canadian dollar, the value of the fund’s non-CAD assets in CAD terms changes, affecting returns. This risk is present even if a fund is global, because foreign currency fluctuations can add or subtract from performance measured in CAD.

Hedging is the tool used to control this risk. It can reduce uncertainty by locking in exchange rates, but it also adds costs and can cause tracking error if the hedge doesn’t perfectly match the fund’s exposure. So currency risk exists and hedging can either mitigate it or introduce additional costs.

The other statements aren’t correct because currency risk is not limited to domestic funds, it does matter for global funds, and currency movements do not guarantee higher returns—there can be losses if movements go the wrong way or if hedging costs erode gains.

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