Hedging a FOREX Mortgage.

[hampy]

I am UK based and intend to take on a foreign currency mortgage in the near future, initially in YEN.
My thoughts are to fully hedge the currency risk, by shorting GBP/YEN with one of the UK spreadbetting firms. To hedge £250k and allowing for wider spreads on the longest contract available I reckon this is between £13/£14 pp.
I am aware that i need to have about £40k available should the hedge lose, but cannot see any other major drawbacks. Should the interest rate on Yen rise I would be able to switch into Swiss Francs and still be paying about half the rate I would be on a UK mortgage, saving about £80k in interest over 10 years.
Can anyone out there see any pitfalls that I've missed, and could anyone recommend a spreadbetter or other broker for taking out the hedge.

Thanks in advance,
hampy

 

[Jack o'Clubs]

I hedged an expected US$ stock award for currency about six months ago. I also looked at hedging the stock price but left it as it's risen over the period. I feel confident in my stock skills to call that one, but not currency and I just wanted to de-risk it! Immediate observations on your situation are:

1) Is there any way of offsetting hedge losses against your tax bill? If so you might want to use forex or a CFD rather than a s/b for the tax losses. It might be worth some thought.

2) Sounds like you're prepared for losses, which is important! My hedge is about £10k down at the moment, which is fine, because it is hedged after all, but I do get fed up dripping more and more into my forex account to cover it and I sometimes have the nagging doubt that I should have left it unhedged! Of course it would be different if the much heralded $ collapse had happened...

3) Theoretically of course the currency should move to counter changes (or anticipated changes) in interest rates, so do you actually gain anything by switching into another currency if Japan rates rise, as that would already be discounted through your hedge? Presumably rising Japanese rates are already discounted in GBP/JPY given developments over the last few weeks?

I ended up using a forex account with CMC markets rather than spreadbetting, as they traded on a 3 pip spread (to be fair not that important on a twelve month position), but more importantly they did not adjust the market interest rates used for financing. This meant that the hedge is more or less cost neutral, and in its earlier days when US rates were lower I actually made a few quid overnight on the interest rate differential. If I had been rolling over quarterly spread bets the wider spread would have added up over time: even more so for the life of a mortgage.

 

[Silent.Trader]

Should the interest rate on Yen rise I would be able to switch into Swiss Francs and still be paying about half the rate I would be on a UK mortgage, saving about £80k in interest over 10 years.

I'm not into currency trading, but how are you going to save on interest if you're hedging the position? IMHO the cost of hedging will be equal to the interest rate differential. I think you have the choice between accepting the currency risk in exchange for the interest differential or pay the standard interest rate.

 

[hampy]

Thanks for the replies so far. It appears I need to do more research into the cost of hedging and the effect of rolling over contracts if spreadbetting.
Will post the answers here when I have them in case anyone else is interested.
All other comments gratefully received,

Thanks

 

[a_gnome]

I think that Silent Trader is correct. Say you borrow Yen for 5 years. You then hedge it by trading GBP/JPY with a delivery date of 5 years time. The forward price that you will be quoted for the rate will be the spot rate adjusted by the interest rate differential. There will be no net financial gain for borrowing at the cheap yen rate. This arbitrage relationship is in fact the basis for working out how forward prices are calculated.

However, if as Jack o'Clubs says, you can put on the hedge with CMC where there is no interest rate differential charge then it should work. Simply short the GBP/JPY to hedge away the currency fluctuations.

BTW I am amazed the CMC do this for just this sort of reason. If this is correct then I'm going to convert my mortgage to JPY asap!

 

[Jack o'Clubs]

CMC charge the interest rate delta between the two currencies you're trading - same as most forex firms except some apply some kind of haircut to the 'official' rate and CMC do not. So when I was short dollars/long sterling when the US interest rates were below sterling, I was getting the difference paid me. Now they're equal then the position is neutral. You and Silent Trader are correct, in that the adjustment for GBP/Yen would be equivalent to the interest rate saving between the two currencies - ie there is no point in hedging the currency risk.

 

[a_gnome]

CMC charge the interest rate delta between the two currencies you're trading .

Thought it was too good to be true. I was about to go and open an account with CMC and another with OandA. Sell a large amount of GBP/JPY with CMC and buy the same amount at OandA. You'd then be paid the interest at OandA on the long GBP but not charged on the short GBP at CMC = free money!

 

[CityTrader]

CMC charge the interest rate delta between the two currencies you're trading - same as most forex firms except some apply some kind of haircut to the 'official' rate and CMC do not. So when I was short dollars/long sterling when the US interest rates were below sterling, I was getting the difference paid me. Now they're equal then the position is neutral. You and Silent Trader are correct, in that the adjustment for GBP/Yen would be equivalent to the interest rate saving between the two currencies - ie there is no point in hedging the currency risk.

This is exactly what forex forward rates do: compensate for the differentials in interest rates.


CT

 

[The Baptist]

I am UK based and intend to take on a foreign currency mortgage in the near future, initially in YEN.
My thoughts are to fully hedge the currency risk, by shorting GBP/YEN with one of the UK spreadbetting firms. To hedge £250k and allowing for wider spreads on the longest contract available I reckon this is between £13/£14 pp.
I am aware that i need to have about £40k available should the hedge lose, but cannot see any other major drawbacks. Should the interest rate on Yen rise I would be able to switch into Swiss Francs and still be paying about half the rate I would be on a UK mortgage, saving about £80k in interest over 10 years.
Can anyone out there see any pitfalls that I've missed, and could anyone recommend a spreadbetter or other broker for taking out the hedge.

Thanks in advance,
hampy

Interesting.

I have two properties currently on Yen mortgages with £425K and £378K respectively in the market.

I am more hedge ambivalent than you in that I have a multi currency set up and will switch if I do not like the movements or trigger is struck, Swissy being the first hiding place as in your strategy.

I do have certain broad trigger points of action but they are a fair bit away from current action ie. 189Yen .

I do watch it most days and trade it most often as i have become comfortable with its ebb and flow, for this I use SB with CMC markets.

I am paying a 1,75 margin on yen (total rate 1,8%) with an EU/P/Bank 1,5 - 1,25 on offer on Euro, Swiss Franc. I would be interested in your deal margin wise and with which bank. email me personally if you prefer and If interested I can tell you who I am with. [email protected]

I have been reading a number of hawks lately, the Yen which has been known as a 'a carry over trade' in the city (read free cost of capital) with many borrowing and investing elese where, it is the view of Money week and the Sunday Times that the good days are over and that interest rates are about to start climbing and with it the Yen.

i am not so sure, a large pensioner age nation is always going to save more than they consume but nonetheless I am watching closely at present.

To me it is no brainer to source capital globally, fancy paying less than £4000 a qtr ie. less than £1350 a month on over £800K, its been worth doing and to date, touch wood, I have not needed to intervene or switch.

Good Luck, be interested to hear anything you feel comfortable to share.

 

[hampy]

Gents, Thanks a lot for your replies. Holding trades overnight is new to me, hence my ignorance of the costs involved in hedging. Unless anyone else is interested I will continue this conversation via e-mail with The Baptist.
Cheers,
hampy