PCO = Passive Currency Overlay

Currency overlay is a strategy international investors and fund managers use to farm out currency risk management to a specialist firm or an overlay manager. Used in global investment portfolios, typically by institutional investors, this separates the management of currency risks from decisions over asset allocation and selection. The currency overlay strategy aims to reduce the currency-specific risks of investing in international equities.

The passive currency overlay is a hedge over the foreign holdings to shift the currency exposure back into the fund's domestic currency without any loss because of exchange rate changes. This process locks in an exchange rate for the contract period, and a new contract is put into force when the older one expires. The product typically used is called a forward contract, which deals with the currency risk without trying to benefit from it. A forward merely locks in an exchange today for delivery of the currency via wire transfer at a predetermined date in the future.