best way to hedge against currency risk when investing in foreign stocks

[Pirilion]

Hi,

I usually trade in US markets but I live in UK.
I want to hedge against the currency risk (when converting from USD to GBP).

What's the best way to hedge here?

I would probably hedge using Forex Options (GBPUSD call options).

Is there a better, cheaper, quicker way?

thx again

 

[TheBramble]

Trade in USD?

Then contact a wholesaler like Voltrex.

Anything fancier will cost you.

 

[Pirilion]

Trade in USD?

can one trade US stocks in GBP or even better, other currencies like roubles, etc???

 

[TheBramble]

Depends on your broker. But you're going to take the hit at some point in the conversion from any currency to any other.

The smart thing is to trade in the currency you can use...

 

[pedro01]

If you are investing in companies in the US that mostly have domestic business, you are more likely to suffer from dollar devaluation than those that are large exporters.

For instance, exports account for approximately 38% of Microsofts revenue and in dollar terms, those exports will rise as the dollar falls as their products are priced in foreign currency in the markets in which it sells. Microsoft export revenue will rise as the dollar drops giving it a kind of inbuilt hedge against the dollars demise.

Obviously Microsoft have costs in foreign countries too - such as India which need to be taken into account but if you can stick with companies that export a lot - you are better off from a currency perspective.

 

[Pirilion]

If you are investing in companies in the US that mostly have domestic business, you are more likely to suffer from dollar devaluation than those that are large exporters.

For instance, exports account for approximately 38% of Microsofts revenue and in dollar terms, those exports will rise as the dollar falls as their products are priced in foreign currency in the markets in which it sells. Microsoft export revenue will rise as the dollar drops giving it a kind of inbuilt hedge against the dollars demise.

Obviously Microsoft have costs in foreign countries too - such as India which need to be taken into account but if you can stick with companies that export a lot - you are better off from a currency perspective.

I understand what u r saying but though valuable advice, its not related to my question. See, I am not asking for advice about which companies to pick, companies which will suffer from or gain from dollar devaluation. Heck, dollar devaluation though likely may npt happen for the time frame I will be investing.

I just want to hedge so that I dont lose from $ devaluation even though by hedging I wont gain from appreciation.

I want to invest in domestic companies whose stock price i think will rise (lets say, their profits wont be affected by $ devaluation) and i want to protect my own gains (and capital) from devaluation. I can do this by hedging. I am asking for advice on the best way to do that.

BTW, I still appreciate your advice. thx.

Depends on your broker. But you're going to take the hit at some point in the conversion from any currency to any other.

How so? Cant I use forex options to hedge against $ devaluation like i mentioned in my first post. Call options on GBPUSD should take care of any $ devaluation.
I only pay the premium on those options. If my gains are decent, its a small price to pay.

The smart thing is to trade in the currency you can use...

But when I but US stocks, I am also investing in $. I cant buy US stocks with GBP. I need to trade in US markets because of many obvious benefits. Moreover, I have a good track-record trading them.

 

[pedro01]

Let's say you want to invest $50K in US stocks.

Now you want to protect the whole $50K from any dollar depreciation ?

How much are you willing to pay for that ? Do you expect it to cost you or not ?

 

[Pirilion]

Let's say you want to invest $50K in US stocks.

Now you want to protect the whole $50K from any dollar depreciation ?

How much are you willing to pay for that ? Do you expect it to cost you or not ?

Yes, I do. Around 5% of the principal. So, in this case around 2.5K.


EDIT - Oh and yes, I do realise that its easier said than done and 5% premium is still costly (i am definitely losing 5% to start with). But thats why I am asking here for alternatives.

 

[NetTecture]

You get that for a lot less.

Just:

* Opena oforex account
* Sell 50.000 USD vs. GPB.

Voila, your exchange rate is 100% fixed - every loss in the value of the USD wil lbe made up by profits in teh forex account. Every profit in exchange rates, the forex deal will eat.

Cost: close to zero - you may gain or pay, depending on interest rate difference, but that is not exactly "cost" of the trade.

FInished.

 

[Pirilion]

u know what, forget options. I m just gonna take 25% from my stock portfolio, buy more GBP or EUR, using margin.

 

[Pirilion]

You get that for a lot less.

Just:

* Opena oforex account
* Sell 50.000 USD vs. GPB.

Voila, your exchange rate is 100% fixed - every loss in the value of the USD wil lbe made up by profits in teh forex account. Every profit in exchange rates, the forex deal will eat.

Cost: close to zero - you may gain or pay, depending on interest rate difference, but that is not exactly "cost" of the trade.

FInished.

oops, srry didnt see u there on the new page. I "quick posted".

but yea, i figured that out but u approved it. thx


NEW QUESTION
IS there a a currency pair that is very proportional to GBPUSD but even less volatile?
this will enable me to use higher margin.

 

[Pirilion]

dont worry, found it
Forex Correlation - Mataf.net

 

[pedro01]

You get that for a lot less.

Just:

* Opena oforex account
* Sell 50.000 USD vs. GPB.

Voila, your exchange rate is 100% fixed - every loss in the value of the USD wil lbe made up by profits in teh forex account. Every profit in exchange rates, the forex deal will eat.

Cost: close to zero - you may gain or pay, depending on interest rate difference, but that is not exactly "cost" of the trade.

FInished.

Worse case situation here is that both your forex trade & your stock trade lose money.

in fact the scenarios are:

1 - stocks go up, dollar goes down - profit
2 - stocks go down, dollar goes down - lose
3 - stocks go up, dollar goes up - profit to loss - depending on the ratios
4 - stocks go down, dollar goes up - big loss

I don't see this as a sensible idea. Like I say - look for stocks with an inbuilt currency hedge. Also - look at stocks of foreign companies listed on US exchanges.

 

[NetTecture]

No, that is not exactly a "worst situation" in this case.

Basically what happens here isi nyour scenario 4:

* Your value of the portfolio is fixed. Naturally the forex account shows lossws... the price for having a fixed account.
* The value of the investment sucks. Which leands you to being overhedged, btw., but then the forex side canbe adjusted extremely fine, so one can adjust the hedge every other day.

 

[Pirilion]

No, that is not exactly a "worst situation" in this case.

Basically what happens here isi nyour scenario 4:

* Your value of the portfolio is fixed. Naturally the forex account shows lossws... the price for having a fixed account.
* The value of the investment sucks. Which leands you to being overhedged, btw., but then the forex side canbe adjusted extremely fine, so one can adjust the hedge every other day.

Exactly.

Value of investment is hedged and can/will be adjusted every other day.
The portfolio is fixed. Losses and profits depend only on the performance of the portfolio in $.

So, if the portfolio value goes up by 10%, add 10% equivalent to forex account, and vice-versa.

 

[Stewenson133]

Worse case situation here is that both your forex trade & your stock trade lose money.

in fact the scenarios are:

1 - stocks go up, dollar goes down - profit
2 - stocks go down, dollar goes down - lose
3 - stocks go up, dollar goes up - profit to loss - depending on the ratios
4 - stocks go down, dollar goes up - big loss

I don't see this as a sensible idea. Like I say - look for stocks with an inbuilt currency hedge. Also - look at stocks of foreign companies listed on US exchanges.

you cannot avoid risk. just want equity risk? buy gbp/usd

 

[jezzicaz789]

Hi,

I usually trade in US markets but I live in UK.
I want to hedge against the currency risk (when converting from USD to GBP).

What's the best way to hedge here?

I would probably hedge using Forex Options (GBPUSD call options).

Is there a better, cheaper, quicker way?

thx again

Hi all, I am a new member of forum. Would a newcomer be warmly welcome here? Good day you guys!!!

 

[Cut Throat Jake]

Hi,

I usually trade in US markets but I live in UK.
I want to hedge against the currency risk (when converting from USD to GBP).

What's the best way to hedge here?

I would probably hedge using Forex Options (GBPUSD call options).

Is there a better, cheaper, quicker way?

thx again

Hi Pirilion,

Did you manage to find a simple way to do this in the end, I am in exactly the same position at the moment and would be grateful if you could describe the method you eventually settled on to protect against currecy risk when trading in US stocks.

Thanks