How to hedge GOLD and GBPUSD

Discussion in 'Commodity Futures' started by Done 777, Aug 1, 2008.

  1. Done 777

    Done 777


    When i buy the gold and sell the GBPUSD i have some hedge, but how big position should to be.

    For example:

    Gold price - 900
    gbpusd - 2.0000
    Gold price (modificated) - 900 * 0.002222 = 1.9998

    How big position should to be? Is there any formula for perfect hedging?
  2. I'm not sure why you are doing this here but:

    1. Hedging a metals position with currencies results in a very poor hedge. For example, for the past six months the correlation between gold futures and the GBP has been 0.44 (not terribly high).

    2. If you insist on doing this hedge EUR might be a better idea since the correlation is a little higher (0.60).

    3. You can figure out the amount by doing a regression and finding the beta.

    4. There is no "perfect hedge". The only completely fool-proof hedge is to flatten your position.
  3. someones going to criticize this- it only took 5 seconds to consider. Why not buy some OTM Calls on Financials as a hedge? (I would not put this trade on myself, but if you are already hedging against a global economic correction with a pound short and a gold buy, it might be worthwhile to put this on as a hedge)

    If you are assuming that gold is tied to the financial well being of the UK or North America, and you are short the Pound, buying some financials could in theory work at a "macro" level.

    you calculate your hedge based on what you estimate the risk is - say you bought gold and could lose max $100 on the price of gold, figure out what a $100 fall would cost you. (I don't know you're contract size or tick value)

    Then figure out how much an increase in the pound would cost in this setup. And then figure out the "leftover" on the pound-gold trade and buy financial call options to cover the difference.
  4. Done 777

    Done 777

    Rather i mean us dollar for hedging, not pound. Long gold and long gbpusd.
    But now i think an arbitrage between the silver and the gold is a better thing.