Currency Risk

From Financial Literacy Wiki

Currency risk refers to the uncertainty of exchange rate of currency. This is risk is seen when investors invest in foreign currency denominated assets.

In Unit Trust

Almost all unit trusts quote prices in Singapore dollars but most of these unit trusts do not invest in Singapore but in a large variety of countries. Thus the volatility of exchange rates of currencies involved would have some impact on the unit trust price. For example, as most healthcare and bio-tech (H&B) unit trusts invest most of their funds in the US (average 78.6% of assets), the volatility of the exchange rate between US dollars and Singapore dollars would affect the unit trusts' prices.

Currency risk can be hedged by using derivatives like currency swap and futures but this would expose unit trust holders to other risks associated with derivatives. Moreover, some currencies are not possible to undertake hedging techniques, as there are lack of underwriters or lack of investors' interest in such derivatives.

For Sector-Specific Unit Trusts, they invest in many countries thus they are able to diversify away some currency risk. For Country-Specific Unit Trusts, currency risk is greater since the exchange rate between Singapore or US dollars with domestic currency would affect greatly, the unit trusts' price.