Hi all, Firstly, yes ive tryed customer service both online & on the phone but they have difficulty in understanding my question. Here goes; I live in Australia and have a AUD dollar IB a/c, i'm wanting to trade US stocks and therefore considering changing my base currency to USD. Now, would I have to buy the AUD/USD fx pair to hedge my currency exposure or when I change my base currency to USD does that simply create a sub-account within my AUD de-nominated a/c therefore taking out the need for me to put on a hedge? Any help is much appreciated. Thanks.
If you trade away from your base currency another line appears in the account window and the interest starts being debited. The way usd/aud is going you want to pay the interest as you will make more interest on your aud than you are debited on usd and if it goes further towards parity you make a capital gain as well.
You don't need to change your base currency to buy US stocks. Base currency is only meaningful for accounting purpose (currency shown on P&L, statements ...etc) and also for wire transfer (you can wire in/out to your local bank in your currency so that you don't need to convert currency back and forth and pay for wire transfer to the US banks). I recommend you stick with your base currency because if you change to USD as your base currency all wire in/out to/from IB would become USD at a New York account and you would have to convert your money at your local bank, and banks charges a high spread. Much higher compared to IDEAL and much much higher than IDEAL Pro. Also you would need to pay for foreign wire transfer. When your base currency is AUD and you want to buy US stocks, all you need to do is to buy USD (using IDEAL or IDEAL Pro with tight spread) to pay for the stock. You can own multiple currency with an IB account no matter what your base currency is. Also, if you don't own any USD in your account you can still buy USD stocks. What IB does is to lend you USD and you will have to pay an interest (but at the same time collect interst on your AUD). IB won't do an automatic currency conversion for you but instead would lend you USD (using your AUD as collateral of course). So you can either pay the interest or you can do your own USD buy backs (using IDEAL or IDEAL Pro) at time you deem proper. You can just buy US stocks without any USD in your account and you will automatically own USD to IB. Given the low interest rate of the USD it these days and the sinking USD it may not be a bad idea to just pay for the interest... I have to confess all the above I've only tried on futures trading. I'm not 100% sure if it's exactly the same with stocks although I believe it's very likely. Hope it helps...
It will be the same. Ozzyarb, don't worry too much about your base currency. I trade in yen, usd, eur and hkd and have balances in all of them despite my base currency being usd. You just trade. IB will charge you interest rate on borrowed dollars if you hold for a while but will pay you interest on your aussy in the mean time at a much higher rate than the usd rate. So trade. Build balances in other currencies. Convert them when you want to ... IB's not in the "rip you off" business, they will take a fair interest but they want you to succeed without having to be clever about shifting dollars around. Good luck.
Thanks guys for the help i think that makes sense. So am I correct in saying that if i buy & hold US stocks while keeping a AUD base currency I am not exposed to movements in the AUD/USD rate because IB has lended me the USD and I pay interest to them on the balance? and when i sell a stock the leftover p/l will be kept on my account as -/+ USD thus exposing me to fx movements but much less than the entire stock position? Thanks again.
You're definitely exposed to currency risk whenever you're buying/selling foreign stocks. In case of a loss with your stock position you will have to pay your USD debt (which you will have to buy with your AUD) and in case of a gain you will have to eventually convert your USD gain into AUD so that you can spend it in your local country. So either way you're always exposed to currency risk. The lending/borrowing scheme implemented by IB is not meant to avoid FX risk, it's just a better way than immediately converting your AUD at arbitrary time whenever you buy/sell a foreign product because you may want to do it on your own (whether before you buy/sell a foriegn product or after) for better timing or you want to do some "carry trade" of some sort. But come to think about it... I think your currency risk is much lower with the borrowing route because essentially by borrowing USD you're sell short the USD dollar equivalent to the size of your stock position and thus I guess there is already a "built-in" currency hedge in this case... all you're exposed is your daily gain/loss. So re-reading your post above I guess you're right. You should only be exposed to the +/- USD. I guess you can even balance your USD gain/loss regularly to completely eliminate FX risk, just for the sake of it
You are exposed for the length that you hold the stock. Your aud balance will have declined and you will own stock (valued in USD). No free lunch. But you're only exposed for the hold period. You could take an idealpro forex position too (50:1 leverage, minimum 25k usd, I think) .... but DONT OVERTHINK THIS THING. If you're a trader then trade. Sometimes currency risk will work for you, sometimes against.
Well if im understanding this right and i'm exposed to fx movements, i think the prudent thing for me to do(because my exposure will be 6 figures), is to convert my account to USD base currency and then immediately sell the equilivant USD and buy the same AUD through through ideal pro, that would rid my a/c of fx exposure and the ideal position should be interest producing and offset my lower account interest. Kiwi, you make a good point about stop worrying about this piddly stuff and just trade but i guess i just don't like to leave room for chances, too many bad memories.....