Hedging the currency risk

[FactualVinay]

Hello everyone,

I have recently made a real estate investment in foreign currency (INR) with a time horizon of 3-5 years. Given the weakness of £ at the moment, I need to hedge my currency risk should £ appreciate. I have checked and there are no futures for GBP/INR in the international markets. So, I am thinking of hedging using GBPUSD pair. What is the best and most cost effective way to hedge given the long time horizon?

Thanks,

Vin

 

[arabianights]

Nothing exchange traded is going to work for you as a sensible hedge. You are much better off speaking to a forex specialist, they'll be able to sort you out.

 

[FactualVinay]

Nothing exchange traded is going to work for you as a sensible hedge. You are much better off speaking to a forex specialist, they'll be able to sort you out.

Thanks Arabian nights!

I have researched vaious options so far and have spoken to quite a few forex specialists. The best advice that came was securing one leg of transaction by investing in GBPUSD futures on CME and hence this question. Is there any forex specialist that you can please recommend?

By the way, someone also advised looking at non deliverable forwards and I discovered that they are only meant for corporates with very high value transactions and not the odd 30-40k that I am trying to hedge.

Thanks and would look forward to more advice.

 

[arabianights]

Seriously, it would be a pretty awful hedge... and I don't know the notional value off the top of my head of the CME futures but I'm fairly sure it'll be more than 40k.

Have you tried speaking to someone like Hi FX? They can certainly arrange forwards for this kind of value...

 

[tripleogstar]

If I was you I would just buy a couple of 3-5yr expiry call options on GBP/INR. May cost you a bit because of the time premium embedded in these long term options. I guess you just need to calculate the point at which your investment would lose money, and buy a call on that particular strike, or lower strike with a breakeven which matches your investment's breakeven. I think saxo provide accounts where you can trade fx options

 

[FactualVinay]

Thanks guys for your advice.

I have spoken to a couple of currency professionals and the findings have been:

1. Due to high differential interest rates, the carry trade costs are going to be prohibitive for GBP/INR over 3-5 years. Also, finding a bank/institution that would offer forward contract in GBP/INR is going to be a nightmare given pair's low tradeability in the international market. Some bank in India might offer this but it is not likely to be easy dealing due to regulations and bureaucracy.

2. Most cost effective and a calculated risk would be to trade in GBP/USD as INR is likely to be more or less constant vs USD, and INR's fluctuation vs GBP would occur at the same time as GBP/USD

3. Out of two instruments - Forward Contract and Carry Spot Hedge, Carry Spot Hedge is a more flexible option and as long as the interest rate differential were to stay in a certain range, it is cost effective too. Forward contracts have their own advantages like no uncertainty around costs escalation once bank's variable profit is agreed upfront.

So, I am likely to make my mind up soon between these two alternatives.

 

[neilfab]

Thanks guys for your advice.

I have spoken to a couple of currency professionals and the findings have been:

1. Due to high differential interest rates, the carry trade costs are going to be prohibitive for GBP/INR over 3-5 years. Also, finding a bank/institution that would offer forward contract in GBP/INR is going to be a nightmare given pair's low tradeability in the international market. Some bank in India might offer this but it is not likely to be easy dealing due to regulations and bureaucracy.

2. Most cost effective and a calculated risk would be to trade in GBP/USD as INR is likely to be more or less constant vs USD, and INR's fluctuation vs GBP would occur at the same time as GBP/USD

3. Out of two instruments - Forward Contract and Carry Spot Hedge, Carry Spot Hedge is a more flexible option and as long as the interest rate differential were to stay in a certain range, it is cost effective too. Forward contracts have their own advantages like no uncertainty around costs escalation once bank's variable profit is agreed upfront.

So, I am likely to make my mind up soon between these two alternatives.

I know this is an old post so you may no longer be interested, but I wonder whether you decided. I just bought a Netherlands rental property by exchanging dollars for euros. I have a 3-5 year horizon as well and would like to limit my currency risk (decline in the euro). The property cost about 500,000 euros.
Thanks
Neilfab

 

[BobbyBB]

If you want to hedge FX risk it's always a good idea to concentrate on the hedge part before you invest in the asset...

 

[neilfab]

If you want to hedge FX risk it's always a good idea to concentrate on the hedge part before you invest in the asset...

I'm sure you're right-but I was wondering whether there's anything to do now that I've made that mistake