How to hedge against currenc risk?

[aa6972]

Thanks for reading this post... could really do with some advice on this please...

I live in the UK and have around 10,000 GBP invest in US stock (KO and YUM atm), Make some gain before but basically all wipe out when exchanging USD back it to GBP. So how do I hedge against the falling USD or raising GBP for that matter?

My broker is TD Direct Invest of which that charge £12.50 commission and charge quite a high spread for currency exchange.

Appreciated the help guys.

 

[anley]

The problem you have is 'curreny risk'. Most people (not saying you) want it both ways, they want to hedge the downside risk but still enjoy any benefits of the currency moving in their favour. Heads they don't lose, tails they win. If anyone can find a way how to do that they have cracked the secret of the markets and will never suffer a losing trade, only scratches and profitable tickets.

The other problem you have is the small amount of money, for that size it's not really possible. Havoing said that, you could probably do it with spread bets but you'd have to pay the margin should the currency move against you, the profit would ve in the stock. Whatever the case you're probably better off buying UK stocks if you're worried about FX risk. If KO and YUM go up, plenty of similar UK ones will as well.

 

[Rhody Trader]

The problem you have is 'curreny risk'.

You both seem to have spelling risk.

The hedge for this type of position would be a long GBP/USD trade in some fashion. Micro futures are available, but I don't think they will specifically match up with your 10k balance, so you'd be either under- or over-hedged. You could go with spot forex and use a mini lot. That would match up right. As anley noted, though, you would have to post margin in either case, and could face an issue if the USD were to rise a lot.

Options are another way to go. With them you could have a hedge that would have a loss in the case of a USD rally capped at the price of the option. The problem here is again one potentially of matching size as well as potentially having to roll forward into new options as they expire if you're going to hold your trades a long time. And of course there's the obvious cost of the options.

 

[Liquid validity]

You could also just trade U.S. stocks in GBP with spreadbets.
Only really viable for swing trades up to 3 months long due to rollover costs
becoming greater than taxes etc. on an unleveraged outright buy.
Just be aware of excessive leverage and margin calls...

I've shown 2 position sizes on each stock to give you an idea of margin requirements.
Those examples are the absolute worst case margin requirement
as no stop loss is specified, you would in reality always trade with a stop loss...
IG offer loads of U.S. stocks, not just DOW30.

 

[intradaybill]

Open a forex account and BUY the equivalent amount in GBPUSD (possibly just two mini lots). Leave enough cash to cover potential losses. When you exchange back your stock account money to GBP you sell the position in GBPUSD. You are (almost) hedged. Note that you can lose money in the fx account if GBP rises against USD but you make that back (almost) from the exchange back from USD to GBP.

This assumes that you will make money trading stocks.

 

[aa6972]

Wow, thanks for the reply guys. Its very helpful, opened up some topic I need to read up as well.

One of the reason I invest in US Stock over UK stock is that more information seems to be available, as well as more liquidity and some free decent charting tool.

Will have a look at all the ideas posted and see which one is more feasible,
I was actually looking at a long GBP ETF but probably not as the tracking error seems quite high and the trading cost.

Thanks again guys.