MSCI hedged indexes

The MSCI Hedged Indexes include both equities and currency components and measure the effects of hedging foreign currencies back to the “home currency.” The equities included in each MSCI Hedged Index are based on an unhedged MSCI parent equity index. The indexes are designed to represent a close estimation of the local currency return of the MSCI parent index that can be achieved by hedging the currency exposures of the MSCI parent index by notionally “selling” currency forwards.

CURRENCY HEDGING IN PRACTICE

If the value of foreign equity rises in terms of a foreign currency, but the currency itself depreciates, this may mitigate the equity’s gains. For example, take a hypothetical U.S. investor who bought shares in Daimler AG, the German auto manufacturer, in April 2014 and then sold those shares in May 2015.



When measured in Euros, the value of the investment rose by 23.21% over the 13-month time period. However, since the Euro-to- USD exchange rate declined from $1.38 to $1.10, that U.S. investor actually would have experienced an investment loss of 1.85%.

On the other hand, by utilizing a currency hedge, that U.S. investor may have attempted to reduce their foreign exchange exposure, to potentially reap more of the 23.21% equity gains without suffering from the full decline in the Euro-to-USD exchange rate.

Investing in foreign companies when the corresponding foreign currency depreciates reduces the gains from foreign investments. Conversely, if the foreign currency appreciates, then gains from the foreign investment are enhanced.

Learn More about Currency Hedging