US$ hedging advice

Discussion in 'Forex' started by dbell66, Nov 23, 2008.

  1. dbell66


    Hi all,

    Before I go to an FX broker with this question, I thought I’d solicit a few opinions, tips and tactics here first. If any of the FX traders here would be so kind?

    I am an EU based stock investor, so my currency measure is the Euro. I wish to buy and hold US equities with a minimum holding timeframe of 1 year.

    Although I’ve bought and sold US stocks in the past, I’ve never really considered the currency risk, until now.

    I have no idea what the US$ will do in future but I’m concerned that over the longer term it will continue to fall. I’m guessing that the rise over the past few months will be temporary.

    I believe some US stocks are on offer at good prices today (in $ terms) and I’ve recently bought and intend to keep buying more US stocks but my fear is that I have bought in at the top of the current US$ rally.

    I bought US$ at 1.25 so if the $ were to go back to, say, 1.60 to the € (and the stocks price stays the same) I’d be looking at a paper loss of about 22%, so-

    What is the best way for me to hedge this risk?

    I’m not seeking opinion on the direction the €/$ will take in future but just how to effectively and cheaply hedge a potential downward move in the US$ to the €.
    Any advice on the best FX broker to use would also be appreciated.

  2. No need for two brokers or an fx broker. Simply get an account with Interactive Brokers, then you can either

    a) use EUR as your base currency, then buy US denominated stocks/etfs etc. ( - click base currency)
    b) use USD as your base currency, then buy the equivalent of EURUSD FX that is equal to your total account liquidation value (in USD). Example: Your account is $100,000. You buy $50,000 worth of SPY, keep $50,000 in cash. Then you buy $100,000 worth of EURUSD FX.

    Two things to consider:

    * interest rate differentials (you pay/receive the carry interest rate differentials)
    * you have to "re-hedge" every once in a while as the value of your account and the hedged currency exposure fluctuate

    All sounds a little complicated, but it's really trivial.