Can i hedge my spot position with future contract?

[drivatives]

Hi

I have a quick question and i hope some one can help.

assuming, i have a open position on AUDUSD Long) and i want to hedge this postion to limit my risk. however, due to the nature of spot market, i will be paying overnight charges on my shot position. i was thinking whether its possible to hedge this position with future contract of this pair (e.g 6au9) to avoid this swaps.

do you think this will work? if not, do you have any solution?

cheers

 

[arabianights]

gammajammer loves this kind of question

 

[Rhody Trader]

You can indeed hedge your spot position in the futures, but the futures prices also factor in the swap/roll. On a short-term basis it may not factor in to price changes for the contracts, but as you extend the term out it will.

But of course if you hedge a spot position with a futures position you are effectively going flat.

What are you trying to accomplish?

 

[drivatives]

what i am trying to do is to offset the risk involve with carry trade.

i am trying to find a solution to offset my risk while gaining the interest. (AUDUSD was just an example). I am very much interested in carry trade concept, however, i don't want to involve the risk, or at least decrease the risk as much as possible.

closing out and reopening the positions on a monthly basis will be fine as the interest will payout the commissions and spreads.

any help on this?

cheers

 

[Rhody Trader]

what i am trying to do is to offset the risk involve with carry trade.

Anything you do to hedge a carry trade will reduce the return. Futures won't serve your purpose because, as I said before, the carry interest is accounted for in the price of the futures. If you're long the spot and short the futures they will effectively offset each other in the carry area (as well as in price).

Remember - no free lunch. You can't get an interest spread at no risk or cost.

Using options could help you, but they have a cost which may reduce your returns more than it's worth doing. Maybe ETFs are an option, but you'd need to research that and they would have an obvious capital outlay.