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# Need help with Foreign Stock/FX risk

Discussion in 'Trading' started by tens, Sep 6, 2008.

1. ### tens

Hello:
Lets assume you have a 10K USD account at IB and you want to buy a Japanese stock at 200,000 yen. Assume USD/JPY at 107.
I could do this two ways:
Method #1: Buy 200,000Y and then buy the stock.
So now: Cash USD: \$8131, Yen Stock: 200,000Y.

If over next year USD/Yen rallies to 120 and I sell my stock for BE, I will have lost vis-a-vis:
Sell stock at 200,000Y, convert back to USD and get \$1667, add back to my \$8131 and get \$9798 so I lost \$202.

Therefore this way, you essentially went SHORT the USD/JPY to the tune of 200,000Y.

Method #2: USD/JPY at 107, as before. Buy 200,000Y stock, but let IB create a loan. Now you are long 200,000Y stock, Short 200,000Y and you are given a USD credit of \$1869. Therefore your USD cash balance is: \$11,869.
For this loan, I will pay IB ~\$40/year in interest on the short Yen.
Now, again USD/JPY rallies to 120. You dump your stock at BE, for 200,000 Yen. You pay back your loan for 200,000Y, and \$1667 is deducted from your cash balance. Your resulting balance is that you MADE \$202.

Therefore, it appears to me that Method #1 is if you want to be SHORT USD/JPY, whereas you would use method #2 to be LONG USD/JPY.

Is this line of thinking correct? And please, no posts about how for such a small sum of money who cares about the FX risk.
Its the PRINCIPLE I want to be verified, not the actual dollar amounts.

thanks and regards

2. ### tens

IN doing further research, I think method #2 is all wet.
What would happen is:
\$10,000 in account. When IB loans you the 200,000Y, it subtracts the actual cash equivalent of the stock from your account, while at the same time creating a USD and JPY column for accounting purposes which indicates your position.

So, with USD/JPY at 107, you would see:
USD: 10,000 (\$8131 + \$1869 USD from FX)
JPY: -200,000

Net USD: \$8131. (The same as method #1).

In the meantime the \$1869/200,000Y FX trade is going to be marked to market as the exchange rate fluctuates and is subject to 2% margin.
The FX mark to market will be reflected on a dollar basis in your Net amount.

Now, USD/JPy goes to 120 and you sell your stock at BE.
You buy back your 200,000Y and get back \$1667 and see:

USD: \$8131+\$1667 = \$9798
JPY: 0

Net USD: \$9798, for a loss of \$202.

Therefore either way you are getting short the USD/JPY when you buy japanese stock-which is what makes intuitive sense.

I think I am clear on this thanks.

3. ### pegasys1

You should also take into account that usd/jpy is going to fall this year.

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