To European (or non US) traders - how do you cover exchange risk ?

Let’s say we open an account of 10.000 Euros in an internet broker to trade in NYSE or Nasdaq stocks.

If we keep the base currency in EUR then:
a) We will have a negative position in USD each time we go long because stocks are traded in USD. We will be paying interests on it.

b) We will suffer exchange conversion slippage bid/ask in each trade (converting EUR to USD and vice versa when the position is closed)

c) We are exposed to the exchange risk on the position held in USD

d) We will only be safe in the remaining cash amount held in EUR.


If we convert all the EUR into USD then:

a) We will not suffer exchange conversion loss bid/ask in each trade. Just once at the beggining.

b) We are fully exposed to the exchange risk, no matter if we have open positions or not.

What is your preferred option to cover the exchange risk EURUSD ?

Thanks
Spec

 

It depends.

If you're afraid/bearish on USD, then stay with your present currency.

If you're a large trader, converting *out* of USD can be a way of diversifying the portfolio so it's less of a concern.

It really depends on what currency you're coming in with, your outlook and overall size.

In the end the less transactions/hedges you make the better unless they're really trades otherwise it's more fees to pay.

 

I keep a big part of the fundings in my base currency (CHF) and convert my gains once in a month back to CHF.

 

My base currency is in Euros, I do a lot of trades in USD and what I want is to only have the stocks trading risk and not caring about EURUSD floating.

If I have an opinion about EURUSD it's somehow like speculating on it which is somehing I don't want.

 

This means that each time you go long on a stock either you stay in a negative position of USD (paying interests) or you are converting from CHF to USD the necessary funds for the position ?

 

I hold no overnight positions, but you are correct. I don't know (yet) a better solution...

 

Given that USD moves opposite to US stocks for some time now,

(1) If you profit from US stocks you lose from the exchange rate

(2) if you lose from US stocks you profit from exchange rate (nice trick of the European traders).

Thus, in this environment there is no viable currency exchange risk startegy unless you know the outcome of your trades. If you know you will make money in US stocks, sell USD forward. If you lose, you will lose in both legs of the trade. You can just hope you will make more n stocks than you lose in exchange rate.

It is better to wait for a coupling of US stocks and USD. Maybe will never happen again, or maybe it will, who knows?

 

At the moment I'm not using this solution, but I used to do this:

Assuming your base currency is EUR:

Open a trading account in USD, and a forex account with base currency EUR. (At the time I used OANDA, no recommendation as I haven't used them for a while - do your own due dilligence)

Every evening I made sure I had a currency position (Short USD / Long EUR) in the forex account for the USD amount of my trading account.

This way your currency risk is minimal...

 

but your portfolio risk is maximum given that USD moves opposite to US stocks...

 

Convert the required account capital into dollars, then use a hedge (futures or forward) to eliminate FX risk and get the commercial borrowing rate. This allows you to avoid ripoff broker loan rates, while keeping exchange rate risk as low as possible. If you don't have enough capital to do this efficiently, then it's best just to borrow dollars from the broker via margin loans.

I would not put my capital into a foreign currency just because I trade that market. There are other reasons for non-Americans owning some dollars, but these reasons have little or nothing to do with opening a dollar trading account.