I read about institution Carry trades all the time. Buy a currency with higher interest, sell one with lower interest. Eg. Long GBP/USD. How do they hedge their position?? The position might drop couple hundred pips, making the profit from interest useless. Since interest is already reflected in the futures/options...how else can they hedge? Arbitrage i understand....its risk free. Quant funds i understand...taking on some risk to trade a statistically valid strategy (some dun work out though, like LTCM). Carry is a mystery to me, and almost no info out there on the net.
http://www.elitetrader.com/vb/member.php?s=&action=getinfo&userid=9219 You might look into some of this guys posts or even PM him if you have specific questions. I haven't personally followed him since I'm a directional trader and not a hedger but at first glance he sure seems to be knowledgeable in this area.
Would you not be at risk to movements in Eur/GBP as what you have done is created a long position in sterling and a short position in the Euro.
lol i used to think the same for EUR/USD & USD/CHF too. Currencies are rather unique in that hedging with correlated pairs don't do squat. Long EUR/USD and Long USD/CHF = Long EUR/CHF. -_-'''
Ok then throw in AUD/JPY to the mix. The more uncorrelated pairs you have the better hedged is your portfolio. Diversification is a good hedging tool. I would like to see some kind of index equivalent to S&P 500 in forex.