Author Topic: Offshore investments currency denomination  (Read 1101 times)

k290

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Offshore investments currency denomination
« on: December 17, 2015, 05:32:03 AM »
When you invest offshore, you have the option for the values of your stock returns being denominated in a foreign currency.

I understand the implication that if that currency weakens relative to your home currency you make some more money, and if it strengthens you will lose some money. This is either adding to or taking from what you have earned in dividends, interest and capital gains.

If anything you are just exposing yourself to currency risk. In what situations would it be a good idea to have your offshore investments denominated in a currency other than your home currency?

Mighty-Dollar

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Re: Offshore investments currency denomination
« Reply #1 on: December 18, 2015, 02:46:18 AM »
Anything with the words off shore you want to avoid. Too many Ponzi schemes. The myth is that there's great rewards in off shore investments. The complete opposite is true.

k290

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Re: Offshore investments currency denomination
« Reply #2 on: December 19, 2015, 01:33:21 AM »
Anything with the words off shore you want to avoid. Too many Ponzi schemes. The myth is that there's great rewards in off shore investments. The complete opposite is true.

I was referring to index funds and etfs. If I wanted to get exposure to the US stock market or Australian stock market this would be an offshore investment. There is nothing wrong with investing in mutual funds that are in other countries. (Most of this forum recommends Vanguard for instance, and I can use it to get US exposure)

The point is I could either have those index funds denominated in the foreign currency or my local currency, and there is not much on the internet to indicate the pro's and con's of each.
« Last Edit: December 19, 2015, 01:38:52 AM by k290 »

Doubleh

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Re: Offshore investments currency denomination
« Reply #3 on: December 19, 2015, 06:57:08 AM »
I suspect that the reason you are finding little to read on the topic is that the question you're asking is not quite the right one.

Whether the fund you buy quotes a price in dollars or in the underlying currency doesn't really make any difference if you're still exposed to the risk of the underlying currency. If your fund has a price quoted in dollars but holds shares denominated in euro and the euro strengthens against the dollar, then the price of the fund in dollars will go down in line with the fall in the value of the dollar. This would be exactly the same as if the fund was priced in euros - in that case the euro price of the fund wouldn't change but the number of dollars you could get by selling it would go down by the same amount as before.

In order to eliminate the risk of changing currency rates you need to buy a fund which hedges it's foreign currency exposure to the dollar. They do this normally by buying derivatives such as FX forwards or swaps which allow them to lock in today's rate against the dollar. This means that the dollar value of the fund will only be affected by the value of the underlying stocks, not by the change in FX rate against the dollar.

Whether you should use a hedged fund our not is not an easy question, but at least by googling for that search term you will be able to find plenty to read up on. The other complication is that not all funds make clear whether or not they hedge fx risk, or the extent to which they do so.

In general the arguments seem to be that hedged funds have lower volatility and seem a safer play if you want to preserve your purchasing power in dollars. The counter argument is that the difference in long term performance between hedged and unhedged funds is generally relatively small and that hedging introduced additional costs which will reduce your returns.

From a philosophical perspective if you're trying to track the global market on the grounds that it is the best available guide to the efficient allocation of capital around the world you should probably stick with unhedged, as FX rates similarly represent the collective best information regarding where to allocate capital.