Guarding against a strengthening in sterling

[SteelSpark]

Hi,
I am based in the UK and have a portfolio which includes US stocks with a value of about 50,000 GBP. I am keen to maintain the portfolio, but I am concerned about sterling eventually strengthening against the dollar, and therefore reducing the sterling value of the portfolio (I will eventually sell the portfolio and transfer the funds back to sterling).

I know almost nothing about Forex, so I wondered if anybody could please help me by pointing me towards any basic strategies that I could use in this situation.

I would expect to hold the stocks in the US portfolio until at least the start of 2011, maybe 2012 and I have them in an Interactive Brokers Reg T margin account.

I would be very happy if I could lock in something close to the current rate, but anything that would allow me to take advantage of a short term weakening of sterling would obviously be much better.

Any help would be greatly appreciated.

 

[NVP]

Hi mate

since everyone is standing off I thought i'd better post something :innocent:

Currencies are a seperate Asset Class and to be managed alongside your other investments

if you are concerned about (eventual) appreciation of GBP to USD then look to an ETF product buying the GBP/USD pairing to add some return to your portfolio if this happens

however I would urge you to consider the inter-relationships between the US markets and the G/U currency pair as they can be interelated as well affecting your weightings

Generally when US stock market up, USD Down (mostly) with GBP up (mostly)
and vice versa

Regards :smart:
NVP

 

[GammaJammer]

Rapid sterling appreciation seems unlikely in the current climate ;-(

 

[Rhody Trader]

however I would urge you to consider the inter-relationships between the US markets and the G/U currency pair as they can be interelated as well affecting your weightings

Generally when US stock market up, USD Down (mostly) with GBP up (mostly)
and vice versa

That relationship is nowhere near as negative as it was last year. In fact, at some points the dollar and stocks are trading in unison. I wouldn't be relying on that.

Regardless, his intention seems to be to hedge. No need to be thinking about forecasting currency movements in that case. There are options. One is to just go long 50k worth of GBP/USD in the spot market. If it's done as a hedge on his equity portfolio, IB may give him a break on the margin requirement.

 

[SteelSpark]

Thanks for all of this input. I thought I had posted another message in this thread a couple of days ago, but it didn't seem to be applied.

Basically, somebody suggested that the following link might be useful:

http://www.retailinvestor.org/hedge.html

Looking at it I thought that perhaps buying a Sterling futures contract might be a good idea. I looked for a quote on IB and found the following, when I previewed an order for 1 contract on Globex:

BUY 1 GBP MAR11 (GBP.USD Forex)

Price: 1.4957
Amount: 93,481.25 USD
Commission: 2.85 USD
Total: 93,484.10 USD

Now, in my very limited understanding, I think that I would initially pay just the 2.85, but that as the value changed money would either be deposited or withdrawn from my account.

Further, it is my understanding that if sterling strengthened against the dollar by 1%, the value of this contract would increase by 1% and that if sterling weakened by 1% the value of the contract would decrease by 1%.

It was also suggested that options on those Futures might be a good idea, but I worry that options pricing might complicate matters, and I would ideally like just a straightforward 1:1 hedge.

As has been mentioned above, I really don't want to speculate on the exchange rates, I would be happy to just take them out of the equation.

John mentions going long 50K worth of GBP/USD in the spot market. I don't really know how to do that, but does it potentially mean that I have to put up 50K? (again the Futures contract interests me, if I am right that I just initially pay the commission and then the difference on a daily basis). Same thing with the ETF, I guess that I would need to tie up funds in that, options would reduce the upfront expense I suppose, but then I worry about having to figure out the options pricing.

I am currently looking to hedge the stocks in my portfolio (simply using Put options), so that I know my worst case scenario over the next few months, and I really want to take the currency risk away. If I can do that, then I may look to invest substantially more.

One more thing that I am not sure about. I paid GBP into my Margin account, converted some of it into USD, but then I started buying USD stocks without converting more. Does that actually have any effect on the situation?

Sorry for all the questions, but Forex is a real blindspot for me, and I'd really appreciate any further advice you can give.

 

[Rhody Trader]

If you go long GBP/USD in the retail spot forex market (which you should be able to do through IB) it would be comparable to going long the GBP futures contract with two advantages. One is that you wouldn't have to deal with quarterly rolls (technically, spot rolls daily, but it's handled automatically). The other is that you can customize the size of your position better in spot than futures.

 

[SteelSpark]

If you go long GBP/USD in the retail spot forex market (which you should be able to do through IB) it would be comparable to going long the GBP futures contract with two advantages. One is that you wouldn't have to deal with quarterly rolls (technically, spot rolls daily, but it's handled automatically). The other is that you can customize the size of your position better in spot than futures.

Thanks John. Excuse my ignorance, but does that mean that I open a position via IDEALPRO such as the following order that I previewed?

BUY 17,000 GBP.USD Forex

Bid: 1.49505
Ask: 1.49525

Amount: 25,411.10 USD
Commission: 2.50 USD
Total: 25,413.60

The preview doesn't seem to suggest a big change in my margin, so does this mean that it works in a similar way to Futures, in that I just pay or gain the difference, rather than having to put down 25,000 USD (cash or margin) to open this position?

Are there any other costs associated with doing it this way compared to a Futures contract, that I need to take into account? In what kinds of situations would buying a Futures contract be preferable to going long on the spot price?

Thanks so much for your help.

 

[Rhody Trader]

The sample sounds right, though you'll want to confirm. I haven't used IB in years and can't remember their set-up.

As you suggest, though, holding a spot position is like holding futures in terms of margin and gain/loss difference. The difference is that where futures prices having interest rate differentials factored in, spot has a daily accounting for it which will show in your account. There shouldn't be much difference in what that interest total ends up being unless there's a big change in the rate spread.

In terms of when futures would be better, if you can get exactly the amount you want via futures then they have the advantage of not having to deal with daily interest/roll, though you would have to roll your contracts on a quarterly basis.

 

[NVP]

Hi,
I am based in the UK and have a portfolio which includes US stocks with a value of about 50,000 GBP. I am keen to maintain the portfolio, but I am concerned about sterling eventually strengthening against the dollar, and therefore reducing the sterling value of the portfolio (I will eventually sell the portfolio and transfer the funds back to sterling).

I know almost nothing about Forex, so I wondered if anybody could please help me by pointing me towards any basic strategies that I could use in this situation.

I would expect to hold the stocks in the US portfolio until at least the start of 2011, maybe 2012 and I have them in an Interactive Brokers Reg T margin account.

I would be very happy if I could lock in something close to the current rate, but anything that would allow me to take advantage of a short term weakening of sterling would obviously be much better.

Any help would be greatly appreciated.

hey mate

popped in again as I have a little early saturday stroll through the threads....(not much chance in the week)

heres graphically the challenge you have got......the left Dow30 has been very strong since Feb......and any direct involvement (ie ownership) of US Assets has had the (expected) neutral/fall of usd currency (green line right chart)....although GBP (red line) collapsed..... so not much damage to your US Stock gains to this point and ironically any hedge buying G/U since Feb would have lost money.......

the uk election brings an unwelcome dimension to GBP activity over next few months
so no one knows what happens next.....

whatever the markets do..... I can guarantee its not what we think.....

Neil
(NVP)