Hi, I'm looking to hedge some of my USD base curency risk now the foreign currencies are beginning to bounce... Assuming I keep base currency set in USD, can anyone please summarise the pros & cons of using futures versus forex to hedge currency risk? For now I'm looking to go 25% AUD, 25% CAD, the remaining 50% USD. My understanding is (and please correct me if I'm wrong or missing anything): futures involve a greater carry fee, normally wider bid / ask spread, greater comissions (?)... Assuming this to be correct... why would anyone use futures over the forex market? Very grateful for any thoughts. Ridu
For one, futures is a regulated and transparent market, spot forex is an unregulated OTC market. if your futures broker goes under your funds are safe, if your spot FX broker goes under you can kiss your funds goodbye. I give my vote to futures.
If you want to do a one time hedge, spread and commission costs should not be a deciding factor. An advantage of spot forex (at some brokers) is that you can hedge your exposure up to the dollar. Futures trade in 125k increments (?), which makes it nearly impossible to hedge your account properly. Plus liquidity is very low on futures outside the a few major pairs. edit: Maybe this is helpful http://fxtrade.oanda.com/learn/basics/hedging_for_companies.shtml
Agree, you are fixed leverage on futures - but futures are way more transparent. For lower risk - go spot. If you trade extensively - commissions become a large issue and expense.