Benefits of FX Hedging

livermoreorless · Jun 20, 2009

I was hoping some more seasoned FX traders could provide clarity on this strategy.

I'm not really quite sure of the benefits?

cstfx · Jun 20, 2009

futures vs spot (6E to EUR)?

Or spot vs spot (EUR to EUR)?

Or long one pair vs short another (EUR to CHF)?

livermoreorless · Jun 21, 2009

Quote from cstfx:

futures vs spot (6E to EUR)?

Or spot vs spot (EUR to EUR)?

Or long one pair vs short another (EUR to CHF)?

I was thinking of the spot fx market

So let's say I'm long GBPUSD - all of a sudden I am getting hammered - so I short now in order to stop the bleeding

Is that the purpose of hedging? But wouldn't that extra short position seriously eat into your margin buying power - which would thereby increase the danger of your fx broker stopping you out on both long and short positions - which would cause even more damage than just one wrong-sided position???

aiyah_mark_lah · Jun 22, 2009

Hedging can mean anything these days.

In FX, 2 possible scenarios

1. Spread arbitrage
2. Hedging, risk reduction, via options and forwards.

livermoreorless · Jun 22, 2009

I dont see the benefit of going long and short a currency pair

Unless someone can explain the benefits???

4XQs · Jun 22, 2009

Ayiah is correct, but it's also a term used by some of the retail newbies who struggle with taking a loss for when they're both long and short a currency cross. Their net position is zero, so it's psychological I guess.

aiyah_mark_lah · Jun 22, 2009

Quote from livermoreorless:

I dont see the benefit of going long and short a currency pair

Unless someone can explain the benefits???

I think you are confused, there is a simultaneously long and short of a SINGLE currency, not a pair.

Of course baring my limited knowledge.

regards

aiyah_mark_lah · Jun 22, 2009

Quote from 4XQs:

Ayiah is correct, but it's also a term used by some of the retail newbies who struggle with taking a loss for when they're both long and short a currency cross. Their net position is zero, so it's psychological I guess.

I remember reading somewhere, its market wizards I think, where the author said nowadays you can look at a "hedge fund" and ask them where's the hedge ?

I think the new term should be financial engineering.

4XQs · Jun 22, 2009

Agreed, but remember that the term hedge fund originates from when they were strictly long/short - thus they at least tried to hedge the exposure to the direction of the general market.

4XQs · Jun 22, 2009

Quote from aiyah_mark_lah:

I think you are confused, there is a simultaneously long and short of a SINGLE currency, not a pair.

Well if you're trading a single currency, you're trading bonds/interest rates (or the index, such as the Dollar Index). In FX you always quote one against the other - buy EUR and sell USD - but I'm sure that's what you meant?

So when these guys say they're long EUR.USD and then say they hedged their position what they did was to buy in their EUR.USD position at a lower level thus effectively being flat. In their mind they now actually have two counter positions. I find it peculiar etc, but that's what the Metatrader-crowd is talking about.