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 JackRab If you buy back the USD balance and sell the GBP balance to 0, then no ...

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Old May 26, 2016, 11:58pm   #9
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Originally Posted by JackRab View Post
If you buy back the USD balance and sell the GBP balance to 0, then no margin. (position is now +/+ USD Stock; no cash balance). But you then create a USD currency risk. Which you could hedge with GBP.USD future.
Yeah, I know there are quite a lot of different ways to achieve a similar result, but I'm not touching options for anything just yet, too much to digest at the some point in time

I need to try on the demo account with the 6B GBP futures contract and with the GBP.USD forex trade and see what's the difference in practice. I had always heard what you mentioned now as well about using futures for this case as the best available option, but briefly looking yesterday to my IB account I noticed that for a GBP.USD forex trade one seemed to need less margin (and I don't think one has the added task of the rollover for a forex trade)... hence that it sounds better than going with the futures way in that sense, but I don't remember of anyone recommending a forex trade over a futures one for hedging, so I might be missing something in this scenario...
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Old May 27, 2016, 1:00am   #10
 
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Originally Posted by mickael28 View Post
but I don't remember of anyone recommending a forex trade over a futures one for hedging, so I might be missing something in this scenario...
Well, if I hedge I use forex, purely because you can trade any size... futures hedge is limited to the contract size... you can trade mini's but I think the spread is larger as well. And I don't worry too much about margin or interest rate since I mainly trade shorter term.
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Old Oct 8, 2016, 8:28pm   #11
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Originally Posted by JackRab View Post
You have no real currency risk, because IB lend you the currency in which you buy.

Example:

GBP.USD = 1.50... USD 150k = GBP 100k

You buy USD 150k worth of stocks... IB will lend you de USD 150k to buy it with, which is a debt (-/-) and the stocks in USD is an asset (+/+). And off course you still have the GBP you had to start with.

If GBP.USD goes to 1.00 and stock price stays the same, you still have USD 150k worth of stocks against USD 150k loan.

When you sell the stocks at that price, you receive back USD 150k is cash, which cancels out the loan.

So... no currency risk. Except for stock price moves... (which might happen because of forex moves, but that's another thing).

If you make a profit on your stocks, let's say you sell for USD 160k... Then you wil lend up with a positive USD cash balance of 10k.... So in effect, you have currency risk on your P/L only.
Hi @JackRab, I've been now trading foreign stocks (US stocks from my UK account) for a while without using the option IB has for hedging currency risk but now that I check the report they create I can see that every time I borrow the US currency they enter the FX rate under the cost price column and then it seems they track this FX rate under the Close Price column.

After reading your explanation above I thought that if I borrowed $59647, like in this case, I was just going to pay interests in that amount but I was not going to have exposure to the USD.GBP currency on that capital (just on the profit/loss).

Do you understand what the 'unrealized P/L in GBP' column mean? It seems to me that because they're logging FX price when the trade was initiated and at present, I have incurred a loss of -£1581 so far (on top of the interests I am paying?

Or am I misunderstanding the meaning of that column?

This is the report:
Click the image to open in full size.
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Old Oct 10, 2016, 3:50am   #12
 
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Originally Posted by mickael28 View Post
Hi
Do you understand what the 'unrealized P/L in GBP' column mean? It seems to me that because they're logging FX price when the trade was initiated and at present, I have incurred a loss of -£1581 so far (on top of the interests I am paying?

Or am I misunderstanding the meaning of that column?

This is the report:
Click the image to open in full size.
So you've bought USD 60k worth of stocks right? And effectively IB has lend that USD amount to you to buy the stocks with?

So, on the loan you do lose that amount, but on the other side your GBP value of the stocks is up by the same... (if the stocks are at the same USD price that is).

If the stocks are still worth the initial USD 60k... than in GBP that will be more than when you bought them, which should cover the GBP 1.580,- loss...

That forex balance statement is basically the FX only... not including the stock position.

Cheers JR
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Old Oct 10, 2016, 12:05pm   #13
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So you've bought USD 60k worth of stocks right? And effectively IB has lend that USD amount to you to buy the stocks with?

So, on the loan you do lose that amount, but on the other side your GBP value of the stocks is up by the same... (if the stocks are at the same USD price that is).

If the stocks are still worth the initial USD 60k... than in GBP that will be more than when you bought them, which should cover the GBP 1.580,- loss...

That forex balance statement is basically the FX only... not including the stock position.

Cheers JR
Thank you for the explanation JR, I think I got it now.

So in my case, it's not like I'm going to pay the borrowed $60K with GBP funds and incur that loss at that time, I'll just pay it back when I sell the stock (directly in USD). So what you mentioned, if the stocks are still worth $60K, there would not be currency risk (just the interests paid on the loan), right?

If my understanding now is correct, thank God you helped me and taught me this. As up until that time I was always using the IB 'FX hedge' but that meant I was purchasing the USD currency and hence I was fully exposed to the currency risk on my principal sum. I don't know why they call it 'FX hedge' when is nothing more than converting currencies without hedging anything?!
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Old Jan 11, 2017, 9:57pm   #14
 
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Thank you for the explanation JR, I think I got it now.

So in my case, it's not like I'm going to pay the borrowed $60K with GBP funds and incur that loss at that time, I'll just pay it back when I sell the stock (directly in USD). So what you mentioned, if the stocks are still worth $60K, there would not be currency risk (just the interests paid on the loan), right?

If my understanding now is correct, thank God you helped me and taught me this. As up until that time I was always using the IB 'FX hedge' but that meant I was purchasing the USD currency and hence I was fully exposed to the currency risk on my principal sum. I don't know why they call it 'FX hedge' when is nothing more than converting currencies without hedging anything?!
Still on the hedging, besides futures you can also think of an ETF of the currency pair instead of using futures (avoiding the roll-over problem).
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Old Aug 8, 2017, 2:58am   #15
 
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If you make a profit on your stocks, let's say you sell for USD 160k... Then you wil lend up with a positive USD cash balance of 10k.... So in effect, you have currency risk on your P/L only.


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.

Last edited by Ceeyee; Aug 8, 2017 at 3:18am.
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Old Aug 14, 2017, 4:27am   #16
 
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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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