Currency Hedging is one of the ways by which risk can be reduced to certain extent as many of the companies in mutual fund and ETF portfolios maybe operating in multiple countries dealing with different currencies as so will be having some degree of currency risk. 
 
  To explain with an example, for ease of understanding let us consider  Acme Company which is based in the United States and has retail stores in the United Kingdom. In this scenario, the company has to provide capital to its U.K. stores, which involves conversion of dollars to pounds. But at the end of the year when the company announces its financial results, it has to again convert the profit of the stores from pound to dollar and if the exchange rate increases, then it has to pay more money out of its pocket. 
 
  Mutual funds and ETFs are also posed to the same risk which makes currency hedging important. 
 
  1. Long term risks can be eliminated
 
  If you want to invest in companies based out of foreign countries then the exchange rate between the currency of your country and the other country will change over time which is dependent of many factors including economy and politics. So currency hedging becomes vital to cut down risks long term. 
 
  2. Portfolio Diversity
 
  If you are  person who is interested in diversifying  your portfolio by investing in the US and other foreign countries and are willing to take more risk for getting higher returns, then again currency hedging is important in order to reduce risk. 
 
  3. Forward Contracts
 
  By forward contract, it is possible for an investor to lock exchange rate for a certain period of time which reduces his risk. Many funds and ETFs hedge currency risk using forward contracts and these contracts can be purchased for every major currency. Though involves cost, in case the exchange rates make the currency less valuable, it protects the value as it is locked. If someone is investing in UK and pound rate declines against dollars, by using forward contract they are not affected. Currency hedging reduces risk and also covers the forward contract cost.
 
  4. Hedging Currency protects investors during sharp falls
 
  Take an example of two Brazilian based mutual funds where one has purchased forward contracts on the Brazilian currency and the other one contains same portfolio of stocks but has not hedged its currency (real). 
 
  And for example if the value of the Brazilian currency increases or stay same against dollar over a period of time, the company that has purchased forward contract will definitely perform much better than the other company, which means currency hedging protects the investor during sharp fall in value of currency. 
 
  Political and monetary variables can bring about expansive changes in return rates. Sometimes, exchange rates can be extremely unstable. A supported portfolio brings about more expenses, however can secure your interest in the case of a sharp decrease in a currency's value.