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Currency Risk for the Czech Investor: How the Koruna Changes Your Returns
Key takeaways
- Every purchase of an asset in a foreign currency carries currency risk — exchange rate movements affect the resulting return in korunas.
- A stronger koruna reduces returns in CZK; a weaker koruna increases them.
- Historically the koruna has gently appreciated against the euro and dollar over the long term.
- Currency hedging reduces volatility, but comes with a fee — usually disadvantageous for long-term investors.
- Intentional geographic diversification spreads, but does not eliminate, currency risk.
Currency risk is an invisible but real component of every purchase of foreign-currency assets for the Czech investor — exchange rate movements between the koruna and the dollar or euro directly alter the final return in CZK.
How Currency Risk Works in Practice
Imagine buying an ETF worth 1,000 EUR when the exchange rate is 25 CZK/EUR. You pay 25,000 CZK. After one year the ETF has risen by 10% — the value is 1,100 EUR. But if the koruna strengthens to 23 CZK/EUR, you receive back only 25,300 CZK. Your return in korunas is a mere 1.2%, even though the fund grew by 10%. If the koruna instead weakens to 27 CZK/EUR, you receive 29,700 CZK — a return of 18.8%. The fund did not move, but you gained or lost on the exchange rate.
Historical Perspective: Koruna vs. Euro and Dollar
The Czech koruna is a relatively stable currency anchored close to the euro. Since the abandonment of the exchange rate floor in 2017, the CNB has allowed the rate to float freely, and over the long term the koruna has gently strengthened thanks to higher productivity and the convergence of the Czech economy. This means a Czech investor in EUR-denominated assets faces a mildly unfavorable currency headwind over the long term — not catastrophic, but measurable.
When Currency Risk Is Greatest
- With a short investment horizon (1–3 years) — exchange rates move quickly
- With high concentration in a single foreign currency (e.g. 90% in USD)
- During periods of market turbulence, when investors move toward safe havens
- When investing in emerging markets with volatile currencies
How to Work With Currency Risk
The simplest protection is global diversification — a portfolio spread across dozens of countries and currencies automatically reduces dependence on a single exchange rate. Currency-hedged ETFs are a second option, but carry higher costs. For the average long-term investor, the most practical approach is to accept currency risk as part of the portfolio and offset it with a sufficiently long time horizon.
FAQ
What is currency risk in simple terms?
The risk that exchange rate movements will change the return on your investment in your home currency. If you buy an ETF denominated in euros as a Czech investor, your return in korunas depends not only on the fund's performance but also on the CZK/EUR exchange rate movement.
How large an impact does the exchange rate have on returns?
Very large in the short term — an annual move of 10% is not unusual. Over a long horizon of 10+ years, fluctuations largely cancel out, but the cumulative drift (koruna appreciation) can modestly reduce returns.
Should I buy ETFs in korunas or euros?
It depends on the denomination of the fund's holdings, not the currency you use to buy it. What matters is what assets the ETF invests in, not what currency it is purchased in. The same ETF bought in EUR or CZK carries the same currency risk from its underlying assets.
Does the CNB protect me from currency risk?
Not directly. The CNB maintains koruna stability but does not guarantee the exchange rate. Since the abandonment of the exchange rate floor in 2017, the koruna has been freely floating and its rate changes with market forces.