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.