How do I hedge a bond portfolio against currency risk?
Ideally I'm looking for books or other references on this topic.
This is a resource you may want to look at.
Additionally, this books seems good for this particular topic:
Risk Without Reward: The Case for Strategic FX Hedging.
Take a look at this article. Also, there is a good reference list in the end.
The idea is you want the hedge to benefit when the bond's currency weakens against the currency you will be exchanging it for.
A couple ways are:
Enter into an FX swap where you pay in the currency you are receiving on the bond and receive another currency. If the currency you are receiving on the bond weakens, you will lose on the bond but gain on the swap.
Buy and FX forward (or similar an FX future) where you are short the currency you are receiving in the bond. Again, when that currency weakens, your hedge position will gain.
These are just a couple simple points on a deeper underlying topic.
Quote: Currency hedging is most commonly carried out with forward contracts, which are agreements with a counterparty to buy or sell one currency against another at a pre-specified exchange rate and time. The agreed upon exchange rate (the forward rate) is a function of the existing spot rate and short-term interest rates in the hedged and base currency. EndQuote. Source: A Short Course in Currency Overlay.
An article I like is Currency Hedging for International Portolios: https://www.imf.org/external/pubs/cat/longres.aspx?sk=23994.0