Currency Carry : How do Banks do it??

Remiraz · Jul 30, 2005

I read about institution Carry trades all the time. Buy a currency with higher interest, sell one with lower interest. Eg. Long GBP/USD.

How do they hedge their position?? The position might drop couple hundred pips, making the profit from interest useless. Since interest is already reflected in the futures/options...how else can they hedge?

Arbitrage i understand....its risk free. Quant funds i understand...taking on some risk to trade a statistically valid strategy (some dun work out though, like LTCM). Carry is a mystery to me, and almost no info out there on the net.

chasinfla · Jul 30, 2005

futures? derivatives? otc options?

gkishot · Jul 30, 2005

How do you think they might hedge their positions?

Lucrum · Jul 30, 2005

http://www.elitetrader.com/vb/member.php?s=&action=getinfo&userid=9219
You might look into some of this guys posts or even PM him if you have specific questions. I haven't personally followed him since I'm a directional trader and not a hedger but at first glance he sure seems to be knowledgeable in this area.

Remiraz · Jul 31, 2005

Quote from TL Trader:

http://www.elitetrader.com/vb/member.php?s=&action=getinfo&userid=9219
You might look into some of this guys posts or even PM him if you have specific questions. I haven't personally followed him since I'm a directional trader and not a hedger but at first glance he sure seems to be knowledgeable in this area.

he doesn't seem to be very good other than using a lot of messy terms.

gkishot · Jul 31, 2005

If you buy GBP/USD & sell EUR/USD you have yourself a hedged portfolio.

londonfxguy · Jul 31, 2005

Quote from gkishot:

If you buy GBP/USD & sell EUR/USD you have yourself a hedged portfolio.

Would you not be at risk to movements in Eur/GBP as what you have done is created a long position in sterling and a short position in the Euro.

Remiraz · Jul 31, 2005

Quote from londonfxguy:

Would you not be at risk to movements in Eur/GBP as what you have done is created a long position in sterling and a short position in the Euro.

lol i used to think the same for EUR/USD & USD/CHF too. Currencies are rather unique in that hedging with correlated pairs don't do squat.

Long EUR/USD and Long USD/CHF = Long EUR/CHF. -_-'''

gkishot · Jul 31, 2005

Ok then throw in AUD/JPY to the mix. The more uncorrelated pairs you have the better hedged is your portfolio. Diversification is a good hedging tool. I would like to see some kind of index equivalent to S&P 500 in forex.

MR.NBBO · Jul 31, 2005

Quote from gkishot:

Ok then throw in AUD/JPY to the mix. The more uncorrelated pairs you have the better hedged is your portfolio. Diversification is a good hedging tool. I would like to see some kind of index equivalent to S&P 500 in forex.

There is, the G-8 currency index.