Hedging currency exposure?

Discussion in 'Professional Trading' started by heech, Feb 9, 2011.

  1. heech


    Just curious how others feel about this.

    My fund is denominated in USD. If I begin trading instruments denominated in the EUR (like Eurex DJ STOXX), should I worry about the implicit currency risk? More specifically, will my *investors* (lets assume institutional) care about the currency risk?

    I'm leaning towards "yes". With EUR/USD moving 10-20% at a time, that can really start to add unnecessary volatility to returns.
  2. It's up to your clients, of course. You might have to do this on an account-by-acount basis.

    In any case, If you are trading cash (as in the actual equities), then yes your fx risk can be considerable and you might need to hedge out your exposure in the forwards market, or something along those lines. If you are trading futures then fx risk is not that big of a deal and you can probably get away with doing a monthly sweep with whoever the holding the futures.
  3. Investors care about making or losing money. If you're running FX risk, you might make or lose money on it. If FX risk is smth you or your investors don't care about and see it as residual, you should hedge, definitely. The issue of how to hedge most efficiently to optimize your transaction costs is smth for you to decide.

    Look at it this way. Suppose you're long EUR and smth happens tomorrow such that you lose money. Suppose I am your investor and I have given you money to run your superb equity strategy. If you tell me that you lost a sh1tload on EURUSD, you'll never see my money again. On the other hand, if you make smth for me on EURUSD, I couldn't care less. So, basically, for you, running FX risk has a very asymmetric payoff, which means you shouldn't do it.
  4. If you have no view then of course you should hedge, what possible reason could there be for coin-flipping with investor capital? If you are down 20%, no one will give a fuck if you lost it in stocks or because the Euro tanked to parity - they will just fire you.