British Pound Sterling Hedging Costs: Exposure to Foreign Currencies

The reference Interest Rate for the British Pound Sterling currency, according to the latest updates from November 2024, stands at 4.75%. The rate is set by the Bank of England (BoE).

The calculation of hedging costs presented on the website only considers the reference interest rates. In reality, hedging may also involve forward contracts, options, and derivative instruments, leading to potentially very different costs.

We also calculate the cumulative hedging costs over different periods, from 6 months to 30 years, and provide a comparison with unhedged returns. This offers a clear view of how hedging impacts performance over time, helping investors assess its potential benefits or drawbacks.

Hedging costs are calculated based on the difference between interest rates of the main refinancing operations.
Hedging a currency with a higher reference interest rate than the one being hedged results in a cost.
Conversely, if the reference interest rate is lower, the hedging cost is negative, effectively providing an extra return for the investor.
Hedging Costs between British Pound Sterling and Major Currencies
Updated as of November 2024
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Hedging against - Current Annualized Hedging Cost (%)
USD CAD EUR JPY AUD
Hedged Currency GBP 0.00% -0.95% -1.29% -4.30% -0.38%
Reference Interest Rate 4.75% 4.75% 3.75% 3.40% 0.25% 4.35%
Data updated as of Nov 07 2024 | Future hedging costs may vary when reference interest rates are reviewed by Central Banks | Actual hedging costs are influenced by various factors; the table offers only an approximation | Credits: WorldGovernmentBonds.com

GBP Hedging vs Unhedging

The table below provides a comparison of GBP-Hedged and Unhedged investment returns.

It highlights how currency fluctuations impact overall performance when investing in foreign assets, over the latest periods.

Hedging is not always convenient. Hedging operations, such as forward contracts, options, or swaps, incur operational costs that can eat into potential profits. It’s important to weigh these costs against the expected benefits of reducing currency risk. In some cases, it may be more advantageous to accept the currency risk rather than bear the fixed costs of hedging.

Hedging costs are calculated based on the difference between interest rates of the main refinancing operations.
The displayed returns show the difference in performance resulting solely from the currency effect, whether the investment was hedged or unhedged. Data are updated to October 2024.
GBP Hedging vs Unhedging
Updated as of October 2024
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Investing in Strategy
Cumulative Return Variation (%), due to currency effect
6M 1Y 3Y 5Y 10Y 20Y 30Y Detail
USD GBP-Hedged -0.10% -0.22% -1.09% -1.66% -4.84% 1.21% 15.01%
Unhedged (USD/GBP) -3.08% -6.23% 5.64% -0.15% 23.42% 41.82% 26.25%
CAD GBP-Hedged 0.32% 0.44% -0.10% -0.68% -2.99% 0.74% 14.05%
Unhedged (CAD/GBP) -4.77% -6.46% -5.91% -5.53% -0.03% 24.20% 22.84%
EUR GBP-Hedged 0.52% 0.88% 2.45% 2.88% 5.43% 10.98% 29.77%
Unhedged (EUR/GBP) -1.79% -3.72% -0.77% -2.76% 7.02% 20.46% 8.13%
JPY GBP-Hedged 2.43% 5.11% 11.12% 11.81% 14.96% 42.43% 135.38%
Unhedged (JPY/GBP) -1.12% -7.17% -21.39% -29.60% -9.53% -2.07% -20.09%
AUD GBP-Hedged 0.37% 0.80% 1.76% 1.64% -4.00% -22.97% -23.57%
Unhedged (AUD/GBP) -2.92% -2.73% -7.68% -4.79% -7.75% 24.50% 11.70%
Highlighted in yellow, when hedging has been advantageous compared to the unhedged exchange rate | To learn more about how the initial data was collected, please refer to the Data Sources page.

There is no general rule that can definitively determine in advance whether hedging is advantageous, as the decision to hedge currency risk depends on a range of subjective and market factors. Each situation is unique, and the benefits of hedging must be evaluated on a case-by-case basis, considering various elements.