Currency Risk

[rawrschach]

I'm trying to figure out how to manage currency risk between a currency that is not easily tradeable and either the USD or GBP.

If I did the following, would I be net neutral in the context of currency risk between currency x and USD? Currency x can easily lose/gain 10% against the USD in any given year.

- put 50% of my account in the non easily tradeable ac at 10% interest pa
- put 50% of my account in a USD account at 0.2% pa

Ideally there would be a leveraged way to counteract the currency risk so I can claim more of the 10% interest but have not been able to find one. Oanda used to offer it but no more.

 

[tar]

You cant be sure it wont move more than 10% against the $ , this wont work unless you find another broker that doesnt charge interest ...

 

[rawrschach]

Agreed, don't think it will work with leverage as the carry costs will negate any benefit.

Unleveraged is the only way I see it working. If I put in USD bonds at .2% and half in X at 10% then I should be currency neutral, correct?

Could also use bonds but that introduces bond price risk.

 

[tar]

Unleveraged is the only way I see it working. If I put in USD bonds at .2% and half in X at 10% then I should be currency neutral, correct?
.

No you aren't currency neutral , your net worth would be less in $ if X moved against you ...

 

[rawrschach]

Can you explain why? I don't understand.

If the exchange rate is 100 and I have 100k USD as well as 10000K X then if X/USD depreciates 10% USD/X must appreciate 10% and net currency value will be the same?

edit: I guess I failed to mention that my home currency is X, not USD.

 

[tar]

Example :

Rate is USD=100X

Lets say you have $200 or 20kX

You split your account : $100 + 10K X

Exchange rate changes to USD = 120X

Now you have : $100 + 10KX ( $83 ) = $183 = 22K X

Your net worth will definitely fluctuates , so you are not currency neutral .