"The foreign currency might not be offered or might have huge spreads. (50-100 pips)" Aussie?! You're a funny guy. Why don't you just take out an AUD-denominated mortgage, instead of presumably using your USD liquid assets? Now you are long the real estate asset and short the local currency, which is exactly what you want for a properly structured currency hedge. Invest those USD assets however you normally would. No need to deposit any funds with a forex dealer or use leverage. You can't completely escape the implied carry cost, but at least you've swapped one short-term floating rate (AUD) for a much longer-term (5-year), say, equity portfolio-type variable return rate (USD), rather than the guaranteed lower short-term floating rate (USD).
Well if you buy real estate in AUD, you should at least wait for a .89 retest before you short the AUD. It is a negative carry trade (slightly), so you will lose 1%/yr doing this.
haha... "I don't think anybody could predict (successfully) where any currency will be 5 days from now" holds just as true.
Why don't you just do it through options? Vanilla AUD put/USD call should be realtively easy to do if you have an account with a bank's brokerage arm like SSB..they may even do a 5-yr fwd for you on that amount if you are a good enough customer
did a quick calc on bloomberg...bit expensive, but may be worth the piece of minf ...5-yr ATM put going for about 9%...would expected the broker to tack un a bit to that though..good luck
I said that in order to get advice on more exotic currency hedges as well. (looking to places as far as south east asia)
You will likely pay an exceedingly high premium for such an option and encounter substantial transaction costs on the position. Even several months out, currency options markets are far too illiquid to make sense to trade. Just my $.02.
yeah like I said was trading at about 18K (ex-the tack up in vol and commission) ...honestly not bad for a 5-yr protection with aussie at these levels...Don;t know what else you would adcvocate when your access to products is so limited like in retail. Obviously the bucket shops offers some things, but wouldn't trust going out six months with them much less 5 yrs
A quick valuation does show a 5-year ATM put for about 18k, as per the Bloomberg screen below, but who is actually going to sell you this option at 18k? Given the absurd illiquidity on anything longer-dated than 3 months on FOP's, I can't imagine that going through any retail brokers could produce a reasonable rate on a 5-year put. If you think that currency hedging is worth 18k over 5 years, then sure, it makes sense. But I highly doubt that you would actually get such a price from anywhere. Corrections on my assertions are more than welcome.