Currency Fluctuation Risk
ETNs traded at TSE are all JPY-denominated. When investing in foreign currency-denominated assets, investors need to consider not only factors giving rise to changes in prices, including stock indices, but also currency fluctuations of local currencies and JPY.
Assuming no price movements, consider the following scenario: you have invested in USD-denominated assets when the exchange rate is JPY 100 against USD; the exchange rate then shifts with USD strengthening and JPY weakening to JPY 110 against the USD; this means that you can profit with that exchange rate by converting the invested USD-denominated assets into JPY. Conversely, if the exchange rate were to shift with USD weakening and JPY strengthening to JPY 90 against USD, you would incur a loss when the invested USD-denominated assets are converted into JPY.
As such, there are always currency fluctuation risks attached to investment in foreign currency-denominated assets.
A Closer Look at Currency Hedge
A currency hedge is a method for reducing the impact of currency fluctuation risks. ETNs tracking currency-hedged indicators are currently available on the market. Such currency-hedged ETNs are incorporated into typical investing in foreign-currency denominated assets. At the same time, by incorporating currency-hedged ETNs in such trading as that of forward exchange contracts where foreign currencies are purchased and JPY sold, investors can expect to see less price movements resulting from the impact of currency fluctuations in terms of the performance of JPY-denominated investments. However, this will not eliminate such impact completely.
With regard to indicators tracking the prices of JPY-denominated assets, ETNs with USD hedge are also listed on the TSE market. These products aim to reduce currency fluctuation risks in terms of USD performance.
In such foreign currency hedge products, the underlying indicator incorporates investments in JPY-denominated assets and forward exchange contracts, where a foreign currency is purchased and JPY is sold, at the same time. As such, in terms of the performance of foreign-currency denominated investment, investors can expect to see less price movements resulting from the impact of currency fluctuations. However, in terms of the performance of JPY-denominated investment, there would be forex losses if the JPY were to gain on the USD, while there would be forex gains if the JPY were to weaken against the USD.
Since trading on the TSE market is conducted in JPY, prices at TSE will reflect currency fluctuations.
Hedging costs for interest rate gaps, etc. between the relevant currencies are also incurred when employing a currency hedge. For instance, when the interest rate of JPY is lower than that of the relevant currencies, the interest rate gap becomes a hedging cost. Higher than expected hedging costs associated with currency hedge may be incurred depending on movements in currencies, interest rates, etc. Investors need to understand such contract specifications before investing.
ETNs tracking currency-hedged indicators
The table below presents ETNs tracking currency-hedged indicators, which are listed on the TSE market. The characteristics of each ETN are disclosed in the securities registration statements of the ETNs and on the websites of issuers.
JPY Hedge (to reduce currency fluctuation risks in JPY-denominated investment performance)
USD Hedge (to reduce currency fluctuation risks in USD-denominated investment performance)
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