Part 5 · Exchange rates and exports: the key to the Korean market · Lesson 28
Overseas stocks and exchange rates: FX exposure and currency hedging
Overseas stock returns come in two layers: the 'stock price' and the 'exchange rate.' Learn how to choose whether to keep or strip out the exchange rate layer.
QToday's question
They say a US stock rose 10% in a year. So why is the return in my account only 4.5%?
US stocks are bought in dollars and move up and down in dollars. But we keep score in won. This is exactly the reverse of the foreign investors in the last lesson. In this lesson we split returns into two layers, 'stock price' and 'exchange rate,' and build up to how currency hedging, which strips out the exchange rate layer, works and why it has a cost.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 27, Foreign investors and the exchange rate, we calculated 'dollar-based return = stock price × exchange rate effect.' This time we use the same formula from our side, holding won. How to read exchange rates from Lesson 23, What is an exchange rate?, and the Korea–US interest rate levels from Lesson 12, An interest rate is the price of borrowing money, are the keys to understanding the cost of hedging.
- STEP 1 · Basic conceptsOverseas stock returns have two layers
You can calculate the return in won as (1 + stock return) × (1 + change in the exchange rate) − 1, and explain what is.
- STEP 2 · Understanding the principleHow currency hedging works and what it costs
You can explain that means locking in the exchange rate in advance with an , and that the comes from the interest rate gap between the two countries.
- STEP 3 · Real-world applicationThe real report cards of three periods
You can compare the results of unhedged and hedged ETFs in 2022, 2025, and 2026, and set your own criteria for choosing what fits your situation.
STEP 1Overseas stock returns have two layers
In Lesson 27, foreign investors kept score on Korean stocks in dollars. This time we, holding won, keep score on US stocks. It is the same formula with the direction flipped.
When you buy a US stock, you are also buying dollars
To buy US stocks with won, you first have to convert won into dollars. So buying a US stock actually means buying two assets together: 'a stake in a US company' and 'dollars.' When you later sell the stock and come back to won, both how much the stock price rose and whether the dollar became more or less expensive in the meantime determine your return. This state of taking the exchange rate change as it comes is called . If you buy overseas stocks directly without any extra arrangement, you automatically have FX exposure.
Let's apply this formula to today's question. If the stock rose 10% and USD/KRW fell 5%, then 1.10 × 0.95 = 1.045, so the return in won is about 4.5%. Roughly adding gives 10 − 5 = 5%, but because the two changes multiply, the exact figure is 4.5%. When the changes are small, estimating by addition is not far off, but the larger the changes, the more you need to multiply to be accurate.
An easy analogy · two escalators
A US stock is a box sitting on an escalator called 'stock price,' and that whole escalator is riding on another escalator called 'exchange rate.' If both escalators go up, you get much higher; if one goes up and one goes down, they cancel each other out. Think of currency hedging as a device that stops the lower escalator.
| Stock price (in dollars) | USD/KRW change | Return in won | How to read it |
|---|---|---|---|
| +10% | +5% (1,300 → 1,365 KRW) | +15.5% | Both escalators go up together |
| +10% | −5% (1,400 → 1,330 KRW) | +4.5% | A stronger won ate into the stock gain |
| −20% | +10% (1,300 → 1,430 KRW) | −12.0% | A stronger dollar reduced the loss |
The third row is important. When the world economy wobbles and US stocks fall, the dollar often gets stronger instead, as we saw in Lesson 24. So for Korean investors, FX exposure sometimes acts as a 'cushion' that reduces losses in a crisis.
Quick checkA US stock rose 20%, and in the meantime USD/KRW fell from 1,450 to 1,305. Roughly what is the return in won?
STEP 2How currency hedging works and what it costs
How does currency hedging, the device that stops the lower escalator, actually work? And what does it cost to use it?
Currency hedging is a promise that fixes a future exchange rate today
means setting today the exchange rate at which you will later convert dollars into won. The contract used for this is an . If you agree with a bank to 'sell $1 for ○○ won one year from now,' you can convert at the agreed rate whether USD/KRW becomes 1,200 or 1,600 during that year. Both the loss from a falling rate and the gain from a rising rate disappear, and only the stock return remains.
It is difficult for individuals to enter forward contracts directly, so hedging is usually done through overseas ETFs listed in Korea whose names end in (H). (H) stands for Hedged, meaning the asset manager strips out exchange rate changes inside the ETF using forwards and similar tools. A product that follows the same index without (H) is the unhedged type. However, because the amount to hedge changes as the stock price moves every day, an actual ETF cannot remove exchange rate changes with 100% precision, and small errors arise.
The hedging cost comes from the interest rate gap between two countries
The forward rate is not the same as the current (spot) exchange rate. For a bank to promise to take dollars one year from now, it offsets the risk by, for example, borrowing dollars now, converting them to won, and putting them to work for a year. The difference between the interest paid on borrowed dollars and the interest earned on the won is reflected in the forward rate. So the following relationship roughly holds.
For example, if the spot rate is 1,400, the dollar rate is 4% a year and the won rate is 3% a year, the 1-year forward rate is 1,400 × 1.03 ÷ 1.04 ≈ 1,386.5. That is like promising to sell a dollar worth 1,400 today for 1,386.5 a year later, so you lose about 1% even if the exchange rate stays the same. This is the , and its size is roughly the gap between the two countries' short-term interest rates. As of September 2026, the US policy rate is 3.75–4.00% and Korea's is 3.00%, so a Korean investor hedging dollars generally pays a cost of around 1 percentage point a year. The actual cost can be higher or lower depending on supply and demand in the FX market.
Conversely, in periods when the won rate was higher than the dollar rate, hedging actually produced a bonus equal to the rate gap. The Korea–US rate trends we saw in Lessons 12 and 13 therefore also carry through to the hedging cost for overseas stock investors.
See it in a chart: unhedged vs. hedged
Move the stock price, the exchange rate, and the hedging cost. You can see how the return in won splits between the unhedged case, the hedged case, and the half-hedged case.
Breakdown of won returns on an overseas stock (1 year, hypothetical example)
The hedged return is simplified as 'stock return − hedging cost.' If the hedging cost is negative, the won rate is higher and hedging produces a bonus. Actual ETFs produce different results depending on fees, tracking error, and dividend treatment.
Press 'Crisis: stocks↓ dollar↑.' Even if the stock falls 20%, if the dollar rises 10%, the unhedged position loses only −12%, while the hedged one loses −21%. Conversely, when the won strengthens, as in 'Today's question,' the hedged position comes out ahead. Neither side is always better; the winner changes with the direction of the exchange rate.
Common misconceptions
- 'If you hedge, there are no losses?'
- No. The only thing currency hedging removes is exchange rate risk. If the stock price falls, you still take that loss in full.
- 'Currency hedging is free insurance?'
- When the dollar rate is higher than the won rate, it costs roughly the rate gap each year. The longer you hold, the more the cost builds up.
- 'FX exposure is risky, so avoid it at all costs?'
- For Korean investors, the dollar has tended to strengthen in crises, so FX exposure has often reduced stock losses. It can add risk, but it can also reduce it.
Quick checkThe dollar rate is 5% a year and the won rate is 3% a year. If you invest in a hedged ETF for one year, roughly what is the hedging cost?
STEP 3The real report cards of three periods
Let's compare three periods to see how two kinds of Korea-listed ETFs tracking the same S&P 500, an unhedged one and a hedged one, actually diverged.
Same index, different results
S&P 500 dollar return · USD/KRW change · return of Korea-listed ETFs
Sources: S&P 500 closing prices from FRED SP500 (Dec 31, 2021 4,766.18 → Dec 30, 2022 3,839.50; Dec 31, 2024 5,881.63 → Dec 31, 2025 6,845.50 → Sep 30, 2026 7,651.54). USD/KRW from FRED DEXKOUS (Dec 30, 2021 1,188.59 → Dec 30, 2022 1,260.18; Dec 31, 2024 1,477.86 → Dec 31, 2025 1,444.55 → Sep 25, 2026 1,356.51). ETF closing prices from Naver Finance (siseJson): unhedged TIGER US S&P500 (360750); hedged KODEX US S&P500 Futures (H) (219480) for 2022 and KODEX US S&P500 (H) (449180) for 2025–2026. All figures are price-based, excluding distributions, and the 2022 hedged product uses futures, so its management method differs slightly. This is an example to show the difference between unhedged and hedged, not a recommendation of any specific product.
2022 is a year when the unhedged 'cushion' did its job. The S&P 500 fell 19.4% in dollars, but fast US rate hikes strengthened the dollar and USD/KRW rose 6.0%. As a result, the unhedged ETF lost less at −15.1%, while the hedged ETF, with the exchange rate effect stripped out, lost −21.9%, even more than the index. This is because from July that year US rates moved above Korean rates, adding hedging costs, futures management costs, and so on.
Jan–Sep 2026 is the opposite. The S&P 500 rose 11.8% in dollars, but the won strengthened and USD/KRW fell 6.1%. The unhedged ETF managed only +5.1%, while the hedged ETF was ahead by more than double at +10.4%. About 1.4 percentage points missing from the index's 11.8% gain is the nine months of hedging cost, management fees, and so on. In a year like 2025, when the exchange rate did not move much, the gap between the two products was small at 0.4 percentage points.
When being unhedged paid off
When USD/KRW rises (stronger dollar). Many of these were crises, when money flowed into dollars amid global economic worries. 2022 and the second half of 2024 are typical examples.When hedging paid off
When USD/KRW falls (stronger won). The won's strengthening has to be larger than the hedging cost. Jan–Sep 2026 is the typical example.For stocks, it goes like this
Even experts find it hard to call the direction of the exchange rate correctly. So rather than picking 'which side is right,' many people choose using the following three criteria, or mix the two. 1 Time horizon. For long-term investing of 10 years or more, the hedging cost that builds up each year becomes a burden, and exchange rate swings also tend to offset each other over the long run. 2 Purpose. If the money will be spent in won, such as retirement funds, and you want to reduce volatility, hedging part of it may give you peace of mind. 3 The current exchange rate level. When USD/KRW is at the high end of its past range, many see relatively more room for it to fall, so many investors raise their hedge ratio. Conversely, when it is at the low end, some increase their unhedged exposure.
If you buy US stocks directly, also note that taxes are calculated in won. Overseas stock capital gains tax converts the sale amount and the purchase amount into won at each day's exchange rate to compute the gain, so currency gains as well as stock gains are subject to tax. To split your own won return into stock price and exchange rate, use the FX Return Calculator, and for taxes use the Overseas Stock Capital Gains Tax Calculator.
It does not always move that way. The tendency for the dollar to strengthen in crises is only a past pattern, and if the Korea–US rate gap changes, the hedging cost changes too. We cannot say that either unhedged or hedged is better, and this content is not a recommendation to buy or sell any specific product.
Quick checkIn 2022, an unhedged ETF tracking the same S&P 500 returned −15.1% and a hedged ETF returned −21.9%. What is the biggest reason for the difference?
✓What we learned today
- The won return on an overseas stock is (1 + stock return) × (1 + exchange rate change) − 1. With the stock +10% and the exchange rate −5%, that is about +4.5%.
- FX exposure means taking exchange rate changes as they come, and currency hedging means fixing the exchange rate in advance with a forward to strip out exchange rate changes. Overseas ETFs listed in Korea with (H) in the name are the hedged type.
- Currency hedging is not free. When the dollar rate is higher than the won rate, it costs roughly the rate gap each year.
- In 2022 the dollar was strong, so the unhedged S&P 500 ETF (−15.1%) lost less than the hedged type (−21.9%), and in Jan–Sep 2026 the won strengthened, so the hedged type (+10.4%) came out ahead of the unhedged type (+5.1%).
- The direction of the exchange rate is hard to call. So rather than 'calling it,' many people mix the two depending on time horizon, purpose, and the current exchange rate level.
You have finished Part 5, Exchange Rates and Exports. In the next Part 6, we follow how commodities such as oil, gold, and copper pass through prices and interest rates to reach sectors. The first lesson is 'Oil is the lifeblood of the economy.'
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. A US stock rose 10% in dollar terms and USD/KRW fell 5%. Roughly what is the return in won?
1.10 × 0.95 − 1 = 0.045, about +4.5%. The two changes are multiplied, not added.
Q2. What does the (H) at the end of the name of an overseas ETF listed in Korea mean?
(H) stands for Hedged. It is a product built to strip out exchange rate changes with forwards and similar tools, so that you receive only the stock return.
Q3. What does the cost of currency hedging mainly come from?
The forward rate reflects the interest rate gap between two countries. When the dollar rate is higher than the won rate, the hedger loses roughly that gap each year.
Q4. The world economy became unstable, US stocks fell sharply, and the dollar strengthened. In this case, which side generally has the smaller loss?
With FX exposure, the won loss shrinks by as much as the dollar rises. In 2022, the unhedged S&P 500 ETF returned −15.1% and the hedged one −21.9%.
Q5. Which of the following statements about currency hedging is correct?
All that hedging strips out is exchange rate changes. If the stock price falls, you still take that loss in full, and costs also arise depending on the rate gap.
NextTerms · Next lesson · Related tools
A state in which the return on a foreign asset takes exchange rate changes as they come. Return in won = (1 + stock return) × (1 + exchange rate change) − 1. Buying overseas stocks directly is basically unhedged.
Currency hedgeCurrency hedgeFixing in advance the exchange rate at which you will convert in the future, using forwards and similar tools, to strip out exchange rate changes. A (H) in the name of an overseas ETF listed in Korea means it is the hedged type. It reduces only exchange rate risk; stock price risk stays the same.
FX forwardFX forwardA contract in which you agree today to exchange currencies at a set exchange rate on a set future date. 1-year forward rate ≈ spot rate × (1 + KRW rate) ÷ (1 + USD rate).
Hedging costHedging costThe cost incurred when hedging currency, roughly the gap between the two countries' short-term interest rates. When the dollar rate is higher than the won rate, a Korean investor hedging dollars is disadvantaged by that gap each year; in the opposite case, a bonus arises.
Exchange rateExchange rateThe rate at which the currencies of two countries are exchanged. USD/KRW 1,400 means it costs 1,400 won to buy 1 dollar.
Weak wonWeak wonA rise in USD/KRW, that is, a fall in the value of the won. It is generally favorable for exporters.
Interest rateInterest rateThe price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
Dollar-based returnUSD-based return(1 + stock return in won) × (1 + change in won value) − 1. This is the return foreign investors actually earn on Korean stocks; when the won weakens, the same stock gain becomes smaller.
Put what you learned to use right away
FX Return Calculator→Overseas Stock Capital Gains Tax Calculator→Macro Map→This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.