# Hedging currency risk



## mtsaustralia (8 May 2008)

Hi,

I currently live in the UK, but trade using IB platform on US markets in USD.

Does anyone have any ideas of the best way to hedge currency risk?  Last year i transfered my GBP to USD to trade, but due to the weak USD i lost quite a bit on Fx translation loss.

Any ideas like buying a currency put option (not sure how thats done)?

Thanks,

Matt


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## doctorj (9 May 2008)

I've never done it - but hedging isn't the apple pie and sunflowers its made out to be. A perfect hedge is really very tough, if not impossible. How do you hedge exposure to a foreign currency denominated asset that changes in value? If you hedge only your exposure to the cost base of the asset and the asset increases at the same time as the currency depreciates, you're still losing out on lost profits.

You could ofcourse redo your hedge from time to time, but how frequently and at what cost?

Best of luck. If you're considering this type of thing, you're probably ahead of the game.  I hope you find a way to make it work for you!


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## wayneL (9 May 2008)

mtsaustralia said:


> Hi,
> 
> I currently live in the UK, but trade using IB platform on US markets in USD.
> 
> ...




Right now, I wouldn't do anything as my feeling is that both the US and EU are intervening to push the USD back up a ways.

But the easiest way to do it fi you have your entire account in USD buy back your pounds via IdealPro and you are perfectly hedged. It will cost you a little in margin and carrying cost.


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## Timmy (9 May 2008)

You can hedge, but like DocJ says the results may be less than what you wish for.  Less than may still be better than not hedged though.

First, though, what sort of amounts are we talking here (I don't expect you to tell us of course, more for you to consider)?  There is going to be an amount at which you will find it difficult to hedge because the sort of institutions that can provide hedging facilities will have minimum volumes.

If you read up on "Forward FX" you should see how hedging can be accomplished.  I don't know of any retail brokers that do it (which doesn't mean there aren't any).  Basically what you will be doing is buying USD against GBP at spot and then coming to an agreement with the broker to return the USD to GBP on an agreed date in the future at a rate agreed today.  The difference between the spot rate and the rate on the future date agreed to today is basically the interest rate differential between the two currencies - so you remove the exchange rate risk.

This is a simplified version, there are myriad variations.  

Here are some links that explain it better than I can (not hard to do...):

http://www.financial-guide.ch/ica/markets/foreign_exchange/fx_fundamentals/wcba5.html

http://www.ozforex.com.au/reference/thebasics.htm


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## pilbara (19 May 2008)

mtsaustralia said:


> I currently live in the UK, but trade using IB platform on US markets in USD.




Depends if you are day trading or investing.  

If day trading, with IB you could set the base currency of your account to GBP.  Every purchase of a contract in USD would be made automatically by IB using a USD loan secured against your GBP.  When you sell at profit you'd end up with your profits in USD.  Convert these back to GBP using IdealPro.

If investing for a longer period you need a currency hedge strategy.  

I have a 3 way hedge with 45% of my stock in $AUD, 30% in Euro and 25% in USD.  This kinda evens out the currency movements, with a longer term view that Euro and Aussie are stronger than USD, and that eventually I will convert back to Aussie.


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