So you're shopping for a broker that will assume part/all of the currency risk for you? Keep us posted how it'll go.
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Discount Stock Broker
- Thread starter shortbleu
- Start date
As shortbleu described above, the broker doesn't take any currency risk whatsoever... but still charges a fee for purchasing "cross-currency" assets. It may not sound much but over long term 1.5%-2% per year add up quick.Quote from orange_trad:
So you're shopping for a broker that will assume part/all of the currency risk for you? Keep us posted how it'll go.
Quote from LeeD:
As shortbleu described above, the broker doesn't take any currency risk whatsoever... but still charges a fee for purchasing "cross-currency" assets. It may not sound much but over long term 1.5%-2% per year add up quick.
Why are you explaining things you don't understand? As shortbleu described there is always currency risk on the entire position between the moment of entering said position and the moment of exiting it. The broker will not take that risk for you.
shortbleu,
Assuming you can't open account denominated in GBP (UK is notoriously short of discount brokers, unless you count spread-betting companies), what would be the main reasons you want this feature? Below I will just mention what some of these reasons can be and how they can be mitigated
a) Currency risk - you can always hold a currency hedge as long as the broker allows currency positions in the same account (I believe MB Trdaing doesn't yet as they haven't fully integrated yet the currency broker they purchased some time ago). Note when you purchase stocks with a GBP denominated account, you lend GBP to the broker at (currently) near zero rate and borrow USD from the broker. Assuming you put GBP10,000 use the whole of your account to purchase stocks without leverage with IB as an example:
1) without conversion you receive 0.009% on the GBP balance and you are charged 1.62% on the negative USD balance, you have nergative balance because you use USD to buy stocks;
2) with conversion to USD you buy GBP10,000 as a hedge using the stocks purchased as the collateral, you receive 0.009% on the positive GBP balance and are charged 1.62% on the negative USD balance, note you pay the same monthly charge whether you hold actual GBP and use it as a collateral or hold USD and use a hedge;
3) you convert to USD and use Globex eMicro futures as a currency hedge. You *receive* 0.38% as a carry and the only costs you encounter are quarterly roll-over and whatever mismatch you have due to the size of the futures.
b) you want to open an account but you don't want to be invested and hold cash for some months. Then in a broker account (with IB as an example) you receive 0.009%. On the other hand, in a bank account, say at Barclay's, you receive 1.26%. The bank pays better interest. Before the credit crunch broker accounts indeed paid very competitive interest compared to saving accounts
c) You find that conversion of GBP into USD performed by your bank is too expensive. This is very true but then there are a number of cheap conversion services
Assuming you can't open account denominated in GBP (UK is notoriously short of discount brokers, unless you count spread-betting companies), what would be the main reasons you want this feature? Below I will just mention what some of these reasons can be and how they can be mitigated
a) Currency risk - you can always hold a currency hedge as long as the broker allows currency positions in the same account (I believe MB Trdaing doesn't yet as they haven't fully integrated yet the currency broker they purchased some time ago). Note when you purchase stocks with a GBP denominated account, you lend GBP to the broker at (currently) near zero rate and borrow USD from the broker. Assuming you put GBP10,000 use the whole of your account to purchase stocks without leverage with IB as an example:
1) without conversion you receive 0.009% on the GBP balance and you are charged 1.62% on the negative USD balance, you have nergative balance because you use USD to buy stocks;
2) with conversion to USD you buy GBP10,000 as a hedge using the stocks purchased as the collateral, you receive 0.009% on the positive GBP balance and are charged 1.62% on the negative USD balance, note you pay the same monthly charge whether you hold actual GBP and use it as a collateral or hold USD and use a hedge;
3) you convert to USD and use Globex eMicro futures as a currency hedge. You *receive* 0.38% as a carry and the only costs you encounter are quarterly roll-over and whatever mismatch you have due to the size of the futures.
b) you want to open an account but you don't want to be invested and hold cash for some months. Then in a broker account (with IB as an example) you receive 0.009%. On the other hand, in a bank account, say at Barclay's, you receive 1.26%. The bank pays better interest. Before the credit crunch broker accounts indeed paid very competitive interest compared to saving accounts
c) You find that conversion of GBP into USD performed by your bank is too expensive. This is very true but then there are a number of cheap conversion services
I explain because I understand. If you don't know how things work or have *limited* experience with brokers please refrain from posting accusations and just ask "how so".Quote from orange_trad:
Why are you explaining things you don't understand? As shortbleu described there is always currency risk on the entire position between the moment of entering said position and the moment of exiting it. The broker will not take that risk for you.
In shortbleu's example GBP10,000 is used as a collateral.
1) The trader borrows USD12,000 from the broker and uses this sum to buy stocks (this borrowing is handled by most brokers as a default action unless the trader has balance in USD which in the example he/she doesn't).
2) The trader sells stocks for USD13,000. Now the broker assumes that USD12,000 is used to make good on the borrowing (no currency risk - the trader borrows USD12,000 and returns USD12,000). The trader is left with USD1,000 profit in the account. This USD1,000 represent the currency risk because when the trader bought stocks USD1,000 could have been 5.2% of the GBP value of the account and after the stocks are sold USD1,000 may represent only 4.9% of teh GBP value of the account.
Quote from LeeD:
I explain because I understand. If you don't know how things work or have *limited* experience with brokers please refrain from posting accusations and just ask "how so".
Obviously you don't understand. Every post you make is proof (ie. not 'accusations') that you seriously lack understanding. In and of itself it's not a problem at all, I just wanted to put a warning sign around your post, so that those who want to understand, will.
no currency risk - the trader borrows USD12,000 and returns USD12,000
And there's no currency risk on the USD 12,000 if the account and the collateral is in GBP? Surely, you jest. Can you guess what the value of
lim f(GBP) is, as GBP->0
f being your collateral, while you're in the position? Just because you choose to ignore the full currency risk, doesn't mean it does not exist.
It doiesn't matter in which currency the account is (it's just for reporting purposes) but the fact that the cash is kept in GBP ensures that the currency risk applies to P&L only.Quote from orange_trad:
And there's no currency risk on the USD 12,000 if the account and the collateral is in GBP?
P.S. A post that makes a statement but fails to explain carries no educational value for any reader.
Hi LeeD,
Thanks very much for your input, very useful.
I contacted a few brokers who accept to open accounts for UK residents but the account has to be opened in USD. So, I am thinking I will do the following:
1) Convert the GBP deposit into USD. As you mentioned, the conversion of GBP into USD performed by my bank is likely to be very expensive. I will have to find a conversion provider to do this. I haven't looked for such a provider yet but will do some research shortly. Eg: say GBP/USD rate is 1.60; a deposit of GBP 4,000, will be become a deposit of USD 6,400
2) Send the USD 6,400 to the US stock broker as deposit.
At the same time, I will have opened a Forex account (with www.forexmicrolot.com for example) for hedging purposes. Hopefully the Forex broker will accept a deposit in GBP so I have no currency risk on my deposit sitting with the Forex broker.
In the forex account, I believe I will need to buy GBP/ sell USD 4,000 to hedge my USD 6,400 deposit I have with the stock broker. Do you agree?
For example I could open the Forex account with http://www.forexmicrolot.com. They provide transations in micro sizes of 1,000; which is very useful to match more accurately the deposit amount I need to hedge.
I believe the only costs of the hedging will be the spread and rollover (the rollover can also be a revenue, see below). Are there any other costs involved in a long term hedge?
On http://www.dailyfx.com/, you can see the central bank rates used to calculate the rollover cost/revenue as follow: GBP 0.5% and USD 0.25%
Since I buy 4000 GBP/USD, i will earn 4000 * (0.005-0.0025) = GBP 10 per year just on the rollover. Do you agree with the calculation?
Please let me know you thoughts.
Thanks
Thanks very much for your input, very useful.
I contacted a few brokers who accept to open accounts for UK residents but the account has to be opened in USD. So, I am thinking I will do the following:
1) Convert the GBP deposit into USD. As you mentioned, the conversion of GBP into USD performed by my bank is likely to be very expensive. I will have to find a conversion provider to do this. I haven't looked for such a provider yet but will do some research shortly. Eg: say GBP/USD rate is 1.60; a deposit of GBP 4,000, will be become a deposit of USD 6,400
2) Send the USD 6,400 to the US stock broker as deposit.
At the same time, I will have opened a Forex account (with www.forexmicrolot.com for example) for hedging purposes. Hopefully the Forex broker will accept a deposit in GBP so I have no currency risk on my deposit sitting with the Forex broker.
In the forex account, I believe I will need to buy GBP/ sell USD 4,000 to hedge my USD 6,400 deposit I have with the stock broker. Do you agree?
For example I could open the Forex account with http://www.forexmicrolot.com. They provide transations in micro sizes of 1,000; which is very useful to match more accurately the deposit amount I need to hedge.
I believe the only costs of the hedging will be the spread and rollover (the rollover can also be a revenue, see below). Are there any other costs involved in a long term hedge?
On http://www.dailyfx.com/, you can see the central bank rates used to calculate the rollover cost/revenue as follow: GBP 0.5% and USD 0.25%
Since I buy 4000 GBP/USD, i will earn 4000 * (0.005-0.0025) = GBP 10 per year just on the rollover. Do you agree with the calculation?
Please let me know you thoughts.
Thanks
shortbleu, you are very welcome!Quote from shortbleu:
Hi LeeD,
Thanks very much for your input, very useful.
It would be more convenient to have the forex hedge with the same stock broker. Over longer term (months) exchange rate may change by 10% - 20%. If the rate moves against you, you should have enough money in the forex account in order to avoid margin call and consequent position liquidation. So, you eitherQuote from shortbleu:
I contacted a few brokers who accept to open accounts for UK residents but the account has to be opened in USD. So, I am thinking I will do the following:
1) Convert the GBP deposit into USD. As you mentioned, the conversion of GBP into USD performed by my bank is likely to be very expensive. I will have to find a conversion provider to do this. I haven't looked for such a provider yet but will do some research shortly. Eg: say GBP/USD rate is 1.60; a deposit of GBP 4,000, will be become a deposit of USD 6,400
2) Send the USD 6,400 to the US stock broker as deposit.
At the same time, I will have opened a Forex account (with www.forexmicrolot.com for example) for hedging purposes.
1) deposit substantial deposit with the forex broker (who may not pay as good interest as a bank) or
2) monitor the forex account closely and transfer additional funds from your stock account to cover any potential shortfall if the pound depreciates against dollar. Such a transfer may not be free and can prove quite a burden if you want to transfer small sums frequently. Similarly, you may want to transfer dollars into your stock account if pound appreciates and the forex position makes money.
Yes, you will need to buy 4,000 GBP/USD. Please double-check the "lot" with your favourite broker is long 1,000 GBP against the appropriate (as the exchange rate dictates) USD amount and not short 1,000 USD against matching GBP amount.Quote from shortbleu:
In the forex account, I believe I will need to buy GBP/ sell USD 4,000 to hedge my USD 6,400 deposit I have with the stock broker. Do you agree?
Quote from shortbleu:
For example I could open the Forex account with http://www.forexmicrolot.com. They provide transations in micro sizes of 1,000; which is very useful to match more accurately the deposit amount I need to hedge.
I believe the only costs of the hedging will be the spread and rollover (the rollover can also be a revenue, see below). Are there any other costs involved in a long term hedge?
On http://www.dailyfx.com/, you can see the central bank rates used to calculate the rollover cost/revenue as follow: GBP 0.5% and USD 0.25%
Since I buy 4000 GBP/USD, i will earn 4000 * (0.005-0.0025) = GBP 10 per year just on the rollover. Do you agree with the calculation?
Please let me know you thoughts.
Thanks
You need to find out what compound yearly rollover rate your favourite forex broker provides. Just ask the support very explicitely and make sure the answer is documented. I checked their web-site; there doesn't seem to be any specific information present. Mayby, subscribing to their papertrading platform gives an idea.
The reason I chose IB as an example is not because they are cheaper or otherwise more suitable but because they actually publish detailed breakdown of both the current rollover cost and how it is calculated. With IB you'd actually be paying 1.6% or GBP64 per year.
Given you are going to use the forex position as a long-term hedge, rollover (or carry) seriously matters.
A typical broker will take 2 benchmark rates (these would most likely be LIBOR for GBP), calculate the difference and add a fee (commission, spread or whatever they may call it) on top. No broker would pay/charge just the difference in benchmark rates without a substantial spread on top. The differences in benchmark rates without spread are for high-rated banks dealing in larger size. As an example, IB would charge 2% per year on top of the benchmark rate difference for balances over USD10,000 and more for smaller balances.
Some brokers state in small print that their "benchmark" is whatever the small group of anonymous people working for the broker (commitee) says. This may mean you pay 5%-10% more than you would using recognised benchmarks + fee on top. Avoid them like plague. This note is more relevant if you buy stocks on margin.