How to hedge currency risk with Interactive Brokers?

This is a discussion on How to hedge currency risk with Interactive Brokers? within the Brokerages forums, part of the Commercial category; Originally Posted by Ceeyee JackRab, do you mean that there is no currency risk when I purchase a foreign stock ...

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Old Aug 14, 2017, 4:27am   #16
 
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Originally Posted by Ceeyee View Post
JackRab, do you mean that there is no currency risk when I purchase a foreign stock on IB, except for the P/L generated later?

How can I hedge the currency risk on the P/L? What would the size of the FX be? I am thinking that it should only match the number in the unrealized P/L column, while position size and realized P/L are irrelevant. Is that correct?

For example, I am a US investor who has bought 1000 EUR of an EUR stock. Today the total unrealized P/L is 100.
In this case, I should only short 100 EUR of EUR/USD to hedge, not 1100 EUR.
If tomorrow the unrealized P/L becomes 80 (regardless wether it's because the market drops or because I have sold some position to realize a profit of 20), then I should reduce the total size of the short to 80 EUR of EUR/USD. Is that correct?

Thanks.
Normally, (at least in my case) it works like I said before. And then, yes, if you're stock portfolio is valued at 1100 Euro, that would mean the 100 Euro in profit is 'unhedged' in fx-sense.

If you were to sell all, you would get 1100 euro in cash, which pays off the 1000 euro loan and so you have net 100 cash...
If you hedged by selling EUR/USD for 100 euro... you would have no euros, since the 100 cash profit in euro's offsets that hedge.

Say you hedged that 100 euros... When you're unrealize p/l goes to 80, due to selling... that would mean you have sold 220 euro's worth of stock... so you received 220 euros in cash. I'm not sure, but it could mean you're hedge is now gone, and you have net 120 in euro.

Or ( and this makes sense to me)... it pays off that loan for 120 euros as well... so now you have no cash euros, 880 euro worth of stock and a 880 euro loan.
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Old Aug 14, 2017, 12:15pm   #17
 
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Originally Posted by JackRab View Post
Normally, (at least in my case) it works like I said before. And then, yes, if you're stock portfolio is valued at 1100 Euro, that would mean the 100 Euro in profit is 'unhedged' in fx-sense.

If you were to sell all, you would get 1100 euro in cash, which pays off the 1000 euro loan and so you have net 100 cash...
If you hedged by selling EUR/USD for 100 euro... you would have no euros, since the 100 cash profit in euro's offsets that hedge.

Say you hedged that 100 euros... When you're unrealize p/l goes to 80, due to selling... that would mean you have sold 220 euro's worth of stock... so you received 220 euros in cash. I'm not sure, but it could mean you're hedge is now gone, and you have net 120 in euro.

Or ( and this makes sense to me)... it pays off that loan for 120 euros as well... so now you have no cash euros, 880 euro worth of stock and a 880 euro loan.
Thanks,

Now it seems like the hedge should simply be:
size of hedge = current EUR value of stock - EUR margin loans, regardless of the change in the size of the unrealized P/L.
Do you think this is correct?
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Old Aug 15, 2017, 1:31am   #18
 
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Thanks,

Now it seems like the hedge should simply be:
size of hedge = current EUR value of stock - EUR margin loans, regardless of the change in the size of the unrealized P/L.
Do you think this is correct?
It's not really a margin loan, just a loan in a different currency.

You start with 1000 USD in cash
You buy 1000 EUR in stocks (assuming EUR/USD=1.00), Interactive Brokers lends you the 1000 Euros on you USD cash balance to buy those stocks.
So you now have 1000 USD in cash, 1000 EUR in stocks and a loan of 1000 EUR.

size of hedge = current EUR value of stock - EUR loan... seems correct. Unrealized P/L goes up and down when value of the stock goes up and down though, so that reflects the same. Stock up 100 Euro, Unr PL up 100 Euro... etc

Good luck trading!
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