currency risk

[cuotes]

Morning

I'm afraid I need a little help here, if you were so kind...

I got an account with my broker in Euros €

Trading almost exclusively in globex, my PnL are in Dollars $.

With eurusd=1.42, a profit of 100$ becomes 70€

I would like to avoid or minimize this effect. Probably buying a mini eurusd future at the same time I open a position. But I don't see clearly how it works...

Anyone have an idea?
thx

 

[gc1]

Do you mean you are looking for a way to get €100 for $100 ? Good luck with that.

As long as your margin funds remain in € so they are not continually depreciating (if the dollar continues going down) there shouldn't be a big problem. It helps if your commissions are $ denominated as well.

 

[cuotes]

I assume that is not possible to get 100€ for 100$ since the eurusd is continuously moving. It is not 1:1

But must be a way to minimize the effect.

Otherwise, if dollar continue depreciating, things will become really hard to people like me, investing in globex with euros. And turning the account into dollars neither helps me, since sooner or later i'll need to convert everything into euros.

 

[varpedo]

I am guessing that you mean that you are looking to minimize the effect of currency fluctuations.

I am looking to do something similar atm. My main funds are in $AUD and I am opening a trading account with a US broker (in $US). I've started looking into hedging my currency risk.

I came across this site: Discover & Learn Forex Hedging | OANDA Forex Consulting
They give an explanation of the process.

 

[gc1]

Be careful about using a spot forex position to hedge currency risk, the broker will charge a premium interest rate on the short currency and pay a low interest rate on the long currency. The difference will accumulate over time. It won't be too bad over a month or two, but holding onto the hedge for a year or more will cost you. If you want to hedge a currency future is best - but the problem is it only being available in set contract sizes (€125,000 and €12,500).

 

[cuotes]

thx guys

I think I'll try with futures or options or maybe CFDs ????

 

[GammaJammer]

The amounts involved are so small by the looks of things that the effects truly are minimal. But basically as I understand it you want to protect from adverse movements in the eur/usd rate when you have a USD P+L that you need to repatriate into EUR.

The solution is fairly simple imho, but it rather depends on what size P+L you are running.

But in basic terms, if your USD P+L is positive, you will need to hedge those dollars buy selling them, in exchange for euros. Once this is done, provided the size of the trade you did in spot is equal to the size of your p+l, you will be hedged.

Of course, there will be an interest rate implication as one poster correctly pointed out, but that may even work in your favour depending on which currencies we're talking about (if, for example, your trading encompasses other products / exchanges) and in any case the effect of the exchange rate movements is usually a fair bit bigger than the effect of the carry, so hedging is advisable if this isn't risk you want to be carrying on your books.

Obviously, the thing to bear in mind once your hedge is established is that your p+l is unlikely to remain static, so you will end up having to adjust the hedge when your P+L changes. Not that you absolutely have to do it every time you trade, but obviously the less often you adjust, the more tracking error there will be between your hedge performance and the expected poerformance of a perfectly hedged account. Again, this could even work in your favour, so it's up to you.

This is basically what pension funds etc wrestle with every day - they may like to buy brazilian equities for example, but not fancy being exposed to the currency risk, so for a US domiciled fund they would buy usd/brl, probably in the NDF forward market rather than spot) in order to mitigate that particular type of risk.

For the large pension fund managers with thousands of trades covering hundreds of markets, potentially for hundreds / thousands of diferent investors, it's obviously not particularly practicable to adjust all this stuff continuously, so what in practice happens is that they have a 'drift tolerance' outside of which they will re-adjust the hedges. So you could do the same - you could put your hedge on and say that you would rebalance every time the exact amount of your P+L moves by, say, 10%. That should strike a balance between a good fit on the hedge and minimising transaction costs and time taken mucking about.

Also, don't forget you probably need to think about your unrealised P+L if it's substantial. I don't know what you're trading so I don't know what sort of swings you see.

Hope that helps - feel free to PM me if you want.

GJ

 

[gooseman]

open your own delta 1 desk

 

[GammaJammer]

Who - me?

 

[gooseman]

no not you. i was being facetious as today is crap with a capital CR

 

[cuotes]

First of all, thank you very much GJ
Hope this thread is useful for more people.

The amounts involved are so small by the looks of things that the effects truly are minimal.

Absolutely right. I move such a small amount of money, that currently I simply don't cover my risk.
But sooner or later (sooner i hope) I'll be moving more money. I need to be prepared when that happens.

I trade in globex futures markets. Basically Corn, emini Nasdaq and 10yrs Note. Each position remains open several hours, sometimes overnight.

One or two contract of each, I can't afford bigger sizes currently.
Eventually, my USD P+L need to be repatriated into EUR. It is converted automatically when I close the position.

With eurusd=1.4200, a profit of 100$ becomes 70€
This is exactly the problem for us. (it is great when you loose)

to hedge those dollars buy selling them, in exchange for euros. Once this is done, provided the size of the trade you did in spot is equal to the size of your p+l, you will be hedged.

Are we talking of buying miniEURUSD futures contracts, for example?

your p+l is unlikely to remain static, so you will end up having to adjust the hedge when your P+L changes.

I've read a little on this topic, but I would like to begin with basic hedges. Later, with more money and experience, I'll try more complex hedges.

Do I cover the global portfolio, or every single trade?
After all, I'm don't hold an open position in the market the whole session.


Hope this thread is useful for more people, since everybody who live with euros (or so) suffer the same issue.

 

[grey007]

This is no risk.

 

[GammaJammer]

This is no risk.

You sure? USD P+L, for someone who has cost base etc in EUR? Sounds like some, albeit smalls, risk to me.

If I have misunderstood then fine, but not convinced I have. I think it's a genuine question deserving of a serious answer, which is why I tried to give one for a change

 

[cuotes]

thanks GJ

Indeed, it's a tiny tiny risk now. But it'll become a bigger risk with time.

In addition, I guess lots of participants over here have the same issue. Even when some of them are not aware of it.