Many Canadian mutual funds invest in markets outside Canada. Foreign investments are usually denominated in foreign currencies, exposing these mutual funds to changes in the exchange rate, either up or down.
For example, consider a Canadian mutual fund that holds US stocks. Investors buy the fund using Canadian dollars. The fund has to convert these Canadian dollars to US dollars in order to purchase US stocks. If the US dollar rises relative to the Canadian dollar, any exchange-rate gain will add to the fund’s total return. However, if the US dollar falls, any decline will reduce the fund’s total return. Even if all the fund’s underlying stocks were to remain unchanged in US dollar terms, the fund would still change in value due to the effects of currency fluctuations because it is priced in Canadian dollars.
Most of Mackenzie’s mutual funds are permitted to use derivative instruments, such as futures or forward contracts, to reduce the impact that a change in exchange rates may have on the Canadian dollar value of their investments. Using derivatives for this purpose is called “hedging”
A mutual fund may seek to hedge all, some or none of its foreign currency exposures.