Currency overlay refers to any currency management strategy that involves using foreign exchange derivatives to modify the currency profile of a portfolio, typically carried out by a specialist firm, the currency overlay manager.

There are several types of currency overlay strategies:

  • Passive Hedging, which seeks to neutralise a portfolio’s existing currency risks.
  • Dynamic Hedging, which seeks to improve on a passive hedging strategy by varying the amount of hedging.
  • Active Overlay, which seeks to obtain positive returns by actively trading a portfolio of currencies, often applied in conjunction with a passive hedging strategy.