Illustrate how currency forwards, futures and swaps alter the risk and return of a portfolio

An investor with foreign assets hedges by selling the foreign currency forward, fixing the rate at which value converts home. Covered interest parity sets the forward price, so hedging a currency whose interest rates exceed the base currency's gives up that yield gap, while hedging a lower-yielding one earns it. Futures do the same job with standard sizes, daily margining and clearing; forwards fit exact amounts and dates. A currency swap exchanges principal at the start and end, with interest in each currency in between, turning foreign-currency borrowing or assets into domestic ones. The trap is that a forward hedges a fixed amount while the asset's value keeps changing, so the hedge ratio drifts and needs rebalancing.