For a U.S. investor, a foreign stock’s return in dollars reflects both the stock’s performance in its local market and the foreign currency’s movement against the dollar. A stronger foreign currency adds to the translated return; a weaker one reduces it. The two effects compound, so a stock can gain locally while losing value in dollars.
How to calculate a foreign stock’s return in your currency
Let R be the stock’s return in its local currency, and F be the change in that currency’s value measured in the investor’s home currency. The exact home-currency return is:
(1 + R) × (1 + F) − 1
This formula assumes the returns cover the same period. It captures the translation effect: when a U.S. investor converts the investment back to dollars, a foreign currency that has lost value against the dollar buys fewer dollars.
Hypothetical example: the foreign currency weakens
Suppose a U.S. investor owns a stock that rises 10% in its local market, while that currency loses 5% of its U.S.-dollar value. The dollar return is 1.10 × 0.95 − 1 = 4.5%, before fees, taxes, or tracking differences.
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Hypothetical example: the foreign currency strengthens
If instead the currency gains 5% against the dollar, the same 10% local stock gain translates to 1.10 × 1.05 − 1 = 15.5%, before fees, taxes, or tracking differences. These examples illustrate the arithmetic; they are not market data or forecasts.
For small moves, people sometimes approximate the result by adding the stock and currency returns. The precise calculation also includes the product of those returns, which matters more as either move grows. S&P Dow Jones Indices explains the compounded calculation in its currency-hedging paper.
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Be explicit about which currency strengthened. “The exchange rate rose” can mean different things depending on how the rate is quoted. For a U.S. investor, say “the euro strengthened against the dollar” or “the dollar strengthened against the euro.” The SEC’s international-investing guidance likewise notes that exchange-rate changes can increase or reduce an investment return.
Why currency can affect a stock twice
There are two related but distinct channels. First, currency movements change the dollar value of a foreign-currency investment when it is translated. Second, exchange rates can affect the company itself: they may change the value of overseas sales, the cost of imported inputs, competitiveness, or the burden of foreign-currency debt. A multinational’s share price may therefore respond to exchange rates even before a U.S. investor translates its return.
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The channels can interact, and stock and currency returns should not automatically be treated as independent. A 2022 study in Oxford Open Economics, “Dollar beta and stock returns,” found higher local-currency stock returns associated with a weaker broad dollar in the markets and periods it studied. That is evidence about its sample, not a rule that every foreign market rises whenever the dollar falls.
A Federal Reserve Board discussion paper, “The Effect of Markups on the Exchange Rate Exposure of Stock Returns,” reports a sample-specific estimate: a 1% dollar appreciation decreased the average industry’s return by 0.13%. This historical estimate is not a universal coefficient or a current forecast; the publication date is not confirmed in the available source information.
What currency hedging changes—and what it does not
A currency hedge uses financial positions to offset some or all of an investment’s exchange-rate exposure. Depending on the fund, market, and mandate, hedging may use forwards, options, or FX swaps. A fund can hedge at the portfolio level; investors may also encounter hedged share classes or separate overlays. Hedging changes currency exposure, not the underlying stock-market exposure: it does not guarantee a return or eliminate equity risk.
When comparing unhedged, partially hedged, and fully hedged investments, check the fund’s prospectus and methodology rather than relying on the label alone. Consider:
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- Exposure target: how much currency movement the strategy aims to retain or offset.
- Risk objective: whether reducing home-currency volatility matters more than retaining currency exposure as part of diversification.
- Implementation: hedge frequency, instruments, roll effects, fees, and tracking differences. “Hedged” does not mean perfect or costless.
- Spending currency and horizon: the relevant currency is the one in which you measure future liabilities, and the effect can differ across time horizons.
- Portfolio composition: currency exposure and companies’ sensitivity to exchange rates vary by country, industry, and business.
There is no universal winner between hedged and unhedged investing. An IMF working paper by Jochen M. Schmittmann examined German, Japanese, British, and U.S. investor perspectives over 1975–2009. Its summary reports that hedging substantially reduced foreign-investment volatility at a quarterly horizon, with a risk-reduction case that remained strong at horizons up to five years; it also found economically meaningful return effects in some cases. The author’s views are not necessarily IMF policy. See IMF Working Paper 10/151.
A separate INSEAD working-paper summary, “Currency Risk Hedging: No Free Lunch,” reports that, in its out-of-sample analysis, hedging reduced volatility but also lowered average returns; Sharpe ratios often deteriorated, and skewness and tail characteristics changed. These findings come from a particular analysis, not a settled result for every portfolio, investor, or period. CFA Institute’s 2026 curriculum reading on currency management also frames exchange rates as a source of potentially marked short- to medium-term effects on investment returns and risks; that educational framing is not a forecast.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Other risks are not currency translation
Foreign investments can face country, market, liquidity, and other risks in addition to exchange-rate changes. In some countries, currency controls may restrict or delay moving capital across borders, which can affect liquidity or value. The SEC discusses these issues in its Investor Bulletin on international investing.
Historical studies also should not be read as current forecasts. For example, an IMF study of 33 industry portfolios across seven major stock markets reported in 2006 that exchange-rate risk was priced in many markets and varied with currency-specific shocks. That finding does not establish a current currency risk premium or a universal effect. See IMF Working Paper 06/194.
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How to apply this to an international investment
- Identify your reporting currency. Measure the outcome in the currency you use to track wealth or meet future expenses.
- Find the investment’s currency exposure. Review the fund or security’s documents; a company’s listing currency alone may not describe all of its business exposure.
- Separate local performance from currency translation. Use the local-market return and the foreign currency’s change against your reporting currency in the compounded-return formula.
- Check whether the investment hedges currency. Read the stated hedge target and methodology, including how often it is rebalanced and what costs or tracking differences may apply.
- Compare the tradeoff with your goal. Decide whether you value lower currency-driven volatility or want to retain currency exposure, while recognizing that neither approach guarantees better returns.
These sources do not establish a current exchange-rate forecast, a universal hedge ratio, or the best fund for a particular investor. For a fund-level decision, use its current prospectus, hedging methodology, and applicable fee and tax information.
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