Spreading in different currencies

[hrokling]

Anyone care to share some ideas for how to approach spreading in different currencies?
(E.g. FTSE vs FESX, ES vs CAC40 or anything as an example, really). I'm thinking without hedging the currency exposure.

It's not something I'm doing at the moment, but I'm interested to hear some opinions on it. Starting out with an example: the ES vs FESX would be 1389 x 50 = 69.450 usd per contract and 3756 x 10 = 37.560 eur per contract - or 58.150 usd using 1.5482 for USDEUR. A ratio of 4:5 would be 96.5% accurate.

Assuming the exchange rate doesn't wander off too much and that in the end each day would even out whether you're making euros or dollars, would anyone say it's worth it to bother with the currency at all? Would it be worth it to hedge the currency exposure overnight, as I'm thinking that exposure should be of little importance for the long term?

Obviously, over time it matters whether your account is in euros or dollars (or pounds), but that's an exposure you'll always have (if you even consider it to be just that).

Any input would be much appreciated.

 

[DT]

IMO you shouldn't worry too much about it if you're only trading small size - the number of contracts you're trading on each leg will only be a rough approximation to the ratio you've calculated for the particular spread you're trading. A small overnight move in the FX rates won't have too much effect on the ratio you trade the legs in.

You ought to be taking into account the average daily range of the contracts too. i.e. if XYZ index has a daily range of 92 and ABC index has a daily range of 47 then (assuming everything else is equal) you'd probably want to trade 2 ACB contracts for every 1 XYZ contract.

The specifics of how you calculate the ratios are down to you really.

 

[hrokling]

Thanks for that - that's pretty much what I've been thinking about it as well. Especially when looking at various interest rate contracts the volatility is important to include.

 

[-oo0(GoldTrader)]

Money
Longer term there are seasonal patterns that you can trade in currencies. Each country has different tax accumulation and funds disbursement policies. Many of these annual patterns can be traded. Many of these offer seasonal spread trading possibilities.

 

[hrokling]

I was thinking of spreading a USD-based equity index future versus a EUR-based index future, so these are two different things. But, you're right - there are some seasonal patterns in currencies for tax/accounting reasons. I've traded them a few times, with success - most notably AUD/JPY for me.

 

[MrGecko]

I wouldn't bother with the currency exposure; unless you are taking a view on the EURUSD and weighting your currency hedges accordingly (and you're right), the transaction costs of keeping yout portfolio EURUSD Delta nuetral are going to be prohibitive IMO. Moreover the bigger the deal, the more accurately you can pick your hedge ratio to suit. On a small scale, you'd need the EURUSD to move by enough to knock your 4:5 ratio out of line, which I think is unlikely overnight.

Then again, if you're moving that kind of size, you should be able to sell strangles covering the EURUSD that'd knock your ratio out too.

I'd make sure you pick your index's carefully - I guess you want to try and trade the spread between two similar contracts, not say the S&P vs the DAX (I don't know if this is a good or bad example, but you get the idea).

 

[hrokling]

Thanks for that, MrGecko - it's always reassuring to hear from someone else sizing matters up the same way as oneself.