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; Hi guys, I've got a GBP account with interactive brokers via a Limited company and I've been making some trades ...

Reply
 
LinkBack Thread Tools Search this Thread
Old May 20, 2016, 11:42am   #1
Joined Apr 2013
How to hedge currency risk with Interactive Brokers?

Hi guys,

I've got a GBP account with interactive brokers via a Limited company and I've been making some trades in the US markets for the last 3 months or so but in most of the trades I've ended up giving back part of the profit when closing the trade and converting back from USD to GBP.

I've read some comments on the forum about this subject but I didn't manage to see how is this currency risk actually hedged with Interactive Brokers?

For example, if I'm investing £30,000; what is the best way/instrument for hedging the investment against currency fluctuations when buying a USD stock with GBP funds?

Thank you!
mickael28 is offline   Reply With Quote
Old May 23, 2016, 1:38pm   #2
Joined Apr 2013
mickael28 started this thread Hiya,

Do you guys think this question would be better asked in a different section of the forum? I'd like to see a practical example of how it's done to try with my Interactive Broker demo account first and after with the real one...

At the moment I've tried using the FX hedge options that one has when entering a trade in a different currency (FX conversion and FX Ideal Pro) but, it seems that in both cases you are still exposed to the currency risk anyway.

Any idea what I should try?

Thanks
mickael28 is offline   Reply With Quote
Old May 24, 2016, 5:12am   #3
 
JackRab's Avatar
Joined Mar 2016
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.
JackRab is offline   Reply With Quote
Old May 25, 2016, 2:01am   #5
 
JackRab's Avatar
Joined Mar 2016
If you want no currency position, then don't do anything when you buy foreign stocks... because, as I mentioned, IB lends you the currency and then effectively you don't have a currency position.
(+/+ USD stocks and -/- USD loan...). But then you do need to pay the interest rate on the loan (1.7% currently).

Alternatively, buy back the stocks and buy back the USD amount to cancel the IB-loan (sell GBP.USD on spot market). Now you do have a USD currency position (150k long). Then hedge the USD-position back to GBP by buying the GBP.USD future... (underlying is USD 62.500, so buy 1 Future at 1.46 is USD 91.250).

The hedge through the future gives you a better, more market conform, interest rate. But, you will need to rollover the future on expiry....

This way is more difficult. I wouldn't do it if you intend to keep the stocks not too long... If you're not too advanced in your trading, don't make it too difficult. ( K.I.S.S. is the principle).
JackRab is offline   Reply With Quote
Thanks! The following members like this post: mickael28
Old May 25, 2016, 11:10pm   #6
Joined Apr 2013
Futures (continuous vs rollover) vs forex trades when hedging?

mickael28 started this thread
Quote:
Originally Posted by JackRab View Post
Alternatively, buy back the stocks and buy back the USD amount to cancel the IB-loan (sell GBP.USD on spot market). Now you do have a USD currency position (150k long). Then hedge the USD-position back to GBP by buying the GBP.USD future... (underlying is USD 62.500, so buy 1 Future at 1.46 is USD 91.250).

The hedge through the future gives you a better, more market conform, interest rate. But, you will need to rollover the future on expiry....
Thanks for the explanation JackRab... I've stopped now converting the currency for the trades that I expect will be shorter term, however I still have some positions that will be there long term and I'd like to learn how to hedge them.

A few more doubts if you have knowledge about this pls?

If I've got an amount of GBP 50,000 that I'd like to hedge I've seen in Interactive Brokers that one can choose different options:
* GBP futures (6B contract) with the contract unit 62,500 GBP
** with options of continuous or 3m expirations
* M6B futures (micro contract) with the contract unit of 6,250 GBP
** with options of continuous or 3m expirations
* GBP.USD forex
Q1- Do you know which instruments are better for the purpose of hedging the currency risk? eg:
Checking their requirements, the GBP.USD forex trade seems to be the one that requires less margin (around £1000 GBP vs £3000 GBP for the futures option), wouldn't that be better than the futures option?

Q2- Regarding the futures, if there's an instrument for a continuous future, wouldn't that be better than getting the 3 months one and having to roll it over every 3m?

Q3- And if the rollover option is better for a reason, does that rollover happen automatically if you keep the position opened? or they close the opened position for you at the end of one contract and you need to manually login to enter a trade for the new contract yourself?

Many thanks...
mickael28 is offline   Reply With Quote
Old May 26, 2016, 6:08am   #7
 
JackRab's Avatar
Joined Mar 2016
Quote:
Originally Posted by mickael28 View Post
T]

Q1- Do you know which instruments are better for the purpose of hedging the currency risk? eg:
Checking their requirements, the GBP.USD forex trade seems to be the one that requires less margin (around £1000 GBP vs £3000 GBP for the futures option), wouldn't that be better than the futures option?

Q2- Regarding the futures, if there's an instrument for a continuous future, wouldn't that be better than getting the 3 months one and having to roll it over every 3m?

Q3- And if the rollover option is better for a reason, does that rollover happen automatically if you keep the position opened? or they close the opened position for you at the end of one contract and you need to manually login to enter a trade for the new contract yourself?

Many thanks...
A1- comes down to costs I guess. If you have GBP 50k in cash and want to sell that to buy USD 75k... than you don't have to post margin, because it is in positive cash. If either one, GBP or USD ends up in negative cash balance, then you start to post margin... because you only look at margin when you have a negative balance. But GBP zero balance and USD 75k pos balance means no margin.

Again, if in your case you buy USD stocks with GBP cash balance, then you post margin on the USD loan, and you pay interest on negative USD cash balance. (position is now +/+ USD Stock; +/+ GBP Cash; -/- USD Cash). No USD currency risk.

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. Remember, the margin you post is not a cost... it's still yours, but you provide that as a safeguard. If the USD drops against GBP, you make a loss on your futures position and you need to post more margin... but that's not really a loss, since it's a hedge, you make money on the conversion to GBP of the stock position. Just make sure you can make the margin payments.

A2- The continous future is only for data and charting. Not as a trade (https://www.interactivebrokers.com/e...continuous.htm).
I don't think that IB has an option to rollover your position on expiry... The "Automatic Futures Rollover" is also purely for data, so the new future is added to your chart or watchlist. I personally wouldn't trust anybody else on a rollover anyway. They do send out a message when you have an open position on expiry I think... (http://ibkb.interactivebrokers.com/node/568)

A3- see A2

Again, KISS... (keep it simple stupid)... Doing the futures hedge is the cheapest if you look at interest rate on negative balances etc, but more of a hassle to do...
JackRab is offline   Reply With Quote
Thanks! The following members like this post: mickael28
Old May 26, 2016, 6:13am   #8
 
JackRab's Avatar
Joined Mar 2016
Also, you can get really creative by trading currency options or options on currency futures!!!
JackRab is offline   Reply With Quote
Reply

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
way to hedge currency risk jain First Steps 1 Feb 5, 2013 7:15pm
Using Fx to hedge currency risk esculapius1975 Forex 2 Dec 17, 2012 1:49pm
EUR/USD hedge at Interactive Brokers blink18 Forex 3 Aug 26, 2010 2:57am
best way to hedge against currency risk when investing in foreign stocks Pirilion Stocks 17 Apr 7, 2010 8:05am
Currency hedge the blades Forex 6 Jan 24, 2008 10:38pm

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)