Hi, I'm looking for a solution and hope you forex traders can help as I don't trade currency. I'm about to load my account (thinkorswim) to trade the US stock market of which I will be using GBP (£). The rate at the moment is - + £1 / $1.46. My problem is how to protect myself from the changing currency rate, for example... I use £10,000 to load my US account = $14,600 for argument sake, in 1 year I still have $14,600 in my account and I wish to move it back to GB pound but now the GBP / USD rate has changed £1 / $2 ($14,600 = £7,300) I would loose 27% of my initial investment just by loading and unloading my account?? Within my thinkorswim account I can trade the forex (using leverage), I thought about insuring any money that I transfer by trading currency equal to that amount, then if the rate changes I will be covered. The idea sounds right but I'm confused to what I should be buying or selling to hedge my funds? I would be greatful on any input. Regards Boyeaton
If you try to use spot forex to hedge it will cost you the daily swaps amounts to hold that position. There is a significant mark-up on these (more expensive that just the difference between the interest rates on the currencies) and will probably add up to around 2% of the amount over 1 year. You could use one of the new CME micro FX futures (1/10'th of the size of standard FX futures) so one lot would have a value of £6,250 (two lots £12,500 etc.), buy a far out one and roll it to a later month before each expiry. The margin required (about $391 per lot, I think) will reduce the funds available for other trading. http://www.cmegroup.com/trading/fx/fx/e-micro-british-pound_contract_specifications.html Or, just take the risk yourself (probably 50:50 which way it will go in the future).
Thanks for your input, but lets say that I am happy with paying 2% by using spot forex, would it be that I buy GBP equal to what I transfer? I'm not looking to profit from this paticular trade, just cover my account. Thanks
Yes, if you send £10,000 to the broker and it's converted to $ then just go long £ vs $ for a size of £10,000 (which is $1 per pip) on the spot forex and that should hedge against any movement in the exchange rate. As your broker balance goes up or down the hedge will be less exact and you may need to adjust it.
Have you consider the option where £1/1$ in a year? If you hedge at 1.46 you will loose. We are all forex traders like it or not. Probably better approach is to hedge against a basket of currencies. IMO the yuan has no where to go but UP.
You could also use a spread betting company for the hedge and use one of the quarterly currency contracts to avoid the daily rollover charges. The spread is wider but it will still be cheaper in the long run. Most only accept bet sizes in multiples of £1 per pip but I think there are some that allow sizes in multiples of pennies per pip.
Thing is with this is that my initial £10,000 = $14,600 @ £1/$1.46 and then in a year my $14,600 = £14,600 @£1/$1
Finspreads, minimum size 50p/pip, I don't know if this means multiples of 50p (so nothing between 50p and £1, probably does). Odlmarkets allow dollar denominated accounts, I don't know if their minimum is then $1/pip or $2/pip, you would have to ask them. Otherwise for £ denominated accounts it's the usual £1/pip minimum. Somebody recently posted on another forum that VDM global markets has a £0.11/pip minimum on £/$. I don't know anything else about them. Some companies have different minimums for forward forex and spot forex, for example ig index is 50p minimum for spot but £1 minimum for forward.