Definition
Currency Overlay
A currency overlay is a strategy that separately manages the foreign-exchange risk of an international portfolio, hedging or actively trading currencies apart from the underlying assets.
When a fund invests in foreign stocks or bonds, returns mix asset performance with currency moves. A currency overlay manager hedges or actively positions the FX exposure independently, so the equity bet isn't muddied by rupee swings.
Indian funds investing abroad and large institutions use overlays to decide how much foreign-currency exposure to keep versus hedge. It treats currency as a distinct source of risk and potential return rather than an accidental by-product of investing overseas.
Related terms
- International FundAn international or global fund invests in stocks listed outside India, giving Indian investors exposure to foreign markets like the US, Europe or China.
- Hedging Forex RiskHedging forex risk means using forwards, futures, options or swaps to lock in or limit the exchange-rate cost of future foreign-currency cash flows.
- Translation ExposureTranslation exposure is the accounting impact on a company's consolidated financials when foreign-currency assets, liabilities and earnings are converted into the reporting currency.
- QuantoA quanto is a derivative whose underlying is in one currency but settles in another at a fixed exchange rate, removing currency risk from a foreign-asset payoff.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.