AUD/USD hedging cost calculator
Quantify the annual cost of hedging a USD-denominated portfolio (US stocks, USD-priced crypto, USD ETFs) against AUD/USD exchange-rate moves. Computes carry cost (the rate-differential cost paid on the forward), rolling spread cost, total hedge cost in AUD and as a percentage of position, plus the comparison vs leaving the position unhedged (1-sigma FX swing reference). Designed for AU-resident investors deciding whether to hedge their USD exposure.
Calculator
Position
Hedge mechanics
Carry negative = AU investor pays (typical when AU rates exceed US). Spread = round-turn cost per roll on the AUD/USD hedge leg.
What is AUD/USD hedging?
For an Australian-resident investor holding USD assets, two forces drive portfolio AUD value: the underlying USD asset performance, and the AUD/USD exchange rate. AUD/USD has historically moved within roughly +/-15% per year (1-sigma), which is often larger than the USD asset's own return. Without hedging, the AU investor's portfolio outcome is dominated by FX moves rather than asset selection.
Hedging neutralises the FX impact. The mechanic: borrow USD synthetically against an AUD position (via forward contract or rolling spot), so that when USD asset value rises 5% in USD terms, the hedge offsets the simultaneous AUD/USD move. The investor locks in a known AUD value of the USD position for the hedge window.
When does hedging make sense?
- Hedge when: investment horizon is short (1-2 years) where AUD/USD mean-reversion does not have time to play out; the position is large relative to AUD net worth (FX risk dominates); you need known AUD outflows (e.g., retirement income).
- Don't hedge when: investment horizon is long (5+ years) where mean-reversion of AUD/USD smooths the FX impact; carry cost is high (AU rates far above US rates, e.g., 2010-2014); the position is small relative to total AU wealth.
- Partial hedge: most institutional managers run 50-80% hedge ratios rather than 0% or 100%. This captures the bulk of FX risk reduction while preserving some AUD/USD upside in scenarios where the AUD weakens.
Methodology
- Position translation. USD amount / AUD/USD spot = AUD position value. Hedged portion = AUD value × hedge ratio. Unhedged = AUD value × (1 - hedge ratio).
- Carry cost. Annual carry % × hedged AUD value. Negative carry input (AU rates > US rates) produces a cost; positive carry produces income. Compounded over the configured horizon.
- Spread / roll cost. AUD/USD pip value at AUD 15.30 per pip per 100,000 AUD lot. Round-turn spread × pip value × position-in-lots × roll frequency × horizon years.
- Total hedge cost. Carry + spread. Annualised and per-horizon both surfaced.
- Unhedged FX risk reference. 10% annualised AUD/USD vol × unhedged AUD value × sqrt(horizon years). This is the 1-sigma reference for FX impact on the unhedged portion. NOT a guaranteed loss; FX moves can be in your favour.
- Expected total return. Hedged USD ROI converted at locked-in rate, plus unhedged USD ROI at the central spot rate (FX volatility ignored for the central estimate), minus total hedge cost.
Limitations
- Constant carry assumption. Real carry varies with interest rates and forward-points pricing. The calculator uses a single annualised carry input.
- Single-currency only. AUD/USD only. Multi-currency portfolios need to run the calculator per pair and sum.
- Spot rate assumed constant. The central-case return assumes AUD/USD ends the horizon at the entry spot rate. Real FX moves are captured in the 1-sigma reference, not the central estimate.
- Tax treatment not modelled. Hedging gains/losses have specific Australian tax treatment that varies by structure. This calculator is economic-cost only.
- Margin / funding not modelled. Rolling spot hedges require margin and potentially face margin calls during FX volatility. Calculator output is a simplified expected cost.
Related tools
- Total Cost of Trading Calculator - which broker is cheapest for running the AUD/USD hedge leg.
- News-Event Spread Widening Simulator - cost impact of rolling hedges around FX-sensitive events.
- Position Size Calculator - size the AUD/USD hedge leg correctly.
- Sharpe / Sortino / Calmar Calculator - assess the risk-adjusted return improvement from hedging.
Frequently asked questions
Hedging neutralises the impact of AUD/USD exchange-rate moves on a USD-denominated portfolio. For an AU investor holding USD assets, AUD/USD can move 10-15% per year against you, which dwarfs typical equity returns. Hedging locks in a known exchange rate for a defined window, eliminating that FX uncertainty. The trade-off: hedging costs money via carry differential (if AU rates differ from US rates) and ongoing spread cost on the rolling hedge.
Carry is the cost or benefit of holding a forward currency position, driven by the interest-rate differential between the two currencies. If AU cash rates are higher than US rates (recent norm: roughly +1.5 percentage points), an AU investor hedging USD into AUD pays carry of approximately 1.5% per year on the hedged portion. If US rates exceed AU rates, the investor would receive carry. The calculator's carry input takes the annualised rate differential.
Not necessarily. Three considerations: (1) AUD/USD is mean-reverting over multi-year windows; hedging locks in the current rate which may not be the long-run average. (2) Carry cost compounds; over 5+ years, hedging cost can exceed expected FX moves. (3) AUD often correlates negatively with US risk assets - an unhedged position naturally hedges against US equity drawdowns. Many institutional managers run partial hedges (50-80%) rather than full hedges to balance these effects.
Three common methods. (1) Currency-hedged ETFs (e.g., VGAD vs VGS for US large-cap): the fund manager runs the hedge internally; trade-off is a higher management expense ratio. (2) Direct AUD/USD forward contracts through an institutional FX broker: tighter spreads but requires institutional account. (3) Rolling spot AUD/USD positions at a retail broker (Pepperstone, IC Markets, etc.): accessible but requires ongoing management and pays spread on each roll. The calculator's pip-spread input accommodates retail roll cost.
Carry flips: the AU investor hedging USD into AUD would RECEIVE carry (positive number) rather than pay. This was the case from approximately 2014-2022 when US rates rose faster than AU rates. In that environment, hedging was nearly free (only spread cost) or even profitable on the carry alone. The current rate environment (2025-2026) has AU rates roughly at or below US rates; check current rates before assuming.
Approximate. AUD/USD realised volatility over the past 20 years has ranged from 6% in calm regimes to 18% during crisis events (2008, March 2020). 10% is a reasonable long-term average. The simulator uses this for the '1-sigma FX swing' reference number on the unhedged portion. For a tighter estimate during your specific horizon, look at the AUD/USD 30-day implied volatility (available on TradingView and major broker platforms).
No, this is single-currency (AUD/USD) only. For portfolios with EUR, GBP, JPY, or other non-USD exposures, run the calculator separately for each currency pair and sum the costs. The methodology is identical; only the volatility and carry inputs change.
Generally yes for assets held on revenue account (trading-classified) and partially for assets held on capital account (CGT-classified), with treatment varying by structure. Forward contracts used to hedge identifiable capital gains can have their gains/losses incorporated into the asset's cost base. For complex structures (forward booked against shares vs CFDs vs derivatives), consult a registered tax agent. This calculator computes economic cost; tax treatment is a separate calculation.
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