Hedging my dollar denominated assets?

Discussion in 'Economics' started by John47, Mar 22, 2008.

  1. John47


    Late to the part I'm sure, but my assets are mostly in cash (US dollars) right now. What strategies are some of you guys using to hedge your own assets as the dollar devalues?

    I'm not really looking to 'trade' here just a way to hedge my cash. I was thinking something along the lines of buying puts on the dollar index with far out expirations (a year or more)...Not looking for huge gains just something that will increase in value about the same rate as if my cash loses anymore.
  2. western


    If you are hedging over 100k, the easiest way is via currency futures trading on the cme. Usually 1-2 pip spread on all the major crosses and the future contracts also efficiently price in the interest rate differentials between the two currencies. The major problem is that you'll will need to pay taxes on any gains when you close out the contracts so take that into account when figuring out your hedge amount.

    The long term method of hedging would be to open a foreign denominated savings account. HSBC, the largest bank in the world, offers this service to their customers who have over 100k in their account. The big problem here is their conversion spread, which is around 1%, or 100 pips. A way around this is to send the money first to a reputable forex broker, like IB, convert the money to the desired currency using their spot forex trading and then wire that money directly into your savings account and save yourself 98 pips.

    A cheaper alternative would be to buy otm currency calls. The phlx options exchange trades currency options up to a year out in the major pairs, which are quoted and traded like normal options. This would protect you against a dramatic crash in the dollar while preventing significant losses should the dollar rally.
  3. Another option would be ETF's.


    I don't own any, and have not researched them closely. Some potential negatives: They probably take a bit of your interest in fees, and, if you are looking for protection against a collapse of the US economy, they might be vulnerable if their parent company were insolvent. I would be curious to hear what someone more knowledgeable thinks.
  4. western


    I find currency ETFs to be a poor hedging vehicle. There is the 0.4% expense ratio, the wide bid/ask ratio to move any size, and the prohibitive margin requirements. ETfs are priced as stocks, so you'd have to put up the entire amount in cash, unless you want to use margin, in which case the additional interest expense would ruin the hedge.

    The only advantage is if somebody wanted to trade less than the 100k currency future minimum, in which case an ETF might be more preferable than using a bucket forex broker.
  5. John47


    Here's the thing about cme currency futs...I don't really want to hedge with any specific currency...I'd rather just be more or less market neutral w/ all the major currencies.

    With that in mind, I'm thinking buying a few of the PHLX calls with a long expiration might be the ticket (on a few different currencies).
  6. whats the symbol on currency neutral options( basically if the overall $ falls my calls go up against a basket of currencies)