What is the best strategy for investors to manage currency risk?

Locking in forward rates for known foreign payments is an effective strategy for managing currency risk because it allows investors to secure a specific exchange rate for a future transaction, mitigating the impact of currency fluctuations. This is particularly relevant for businesses or investors involved in cross-border operations, where exchange rate volatility can significantly affect profitability and cash flow.

Using forward contracts provides certainty over future costs and revenues in foreign currencies, allowing for more accurate financial planning and budgeting. By hedging against potential adverse movements in exchange rates, investors can protect themselves from unexpected losses.

In contrast, investing purely in large stocks in the home market does little to address currency risks associated with international investments. Investing in pegged currencies may provide some stability but does not fully shield investors from fluctuations, especially if the peg is broken. Finally, vacationing in a country with a weak currency does not provide any financial benefit or strategic management of currency exposure in an investment context.