EUR/USD Hedging

Quote from drm7:

Both spot FX and forwards are traded through a dealer. Trading with a dealer literally means TRADING with it - he takes the other side of your trade. Spot FX resets every day, while a forward rate is guaranteed for the term of the contract.

FX futures are standardized contracts trade that through an exchange via a futures broker (EuroUSD Fx trades through the Chicago Mercantile Exchange.) The broker/exchange only acts as a middleman - you trade with another person. Futures are like forwards - you have to "settle up" at the end of the term, but have standardized contract sizes and terms (Euro futures trade in $125,000 contracts and expire a few times per year.)

So, forward contracts give you more flexibility with size and term, but there are fewer dealers out there that can do them, while it is generally easier to trade futures (at least during market hours), but you are limited to their specific terms and sizes. FX spot has plenty of dealers that would be willing to do business with you, but spot is used more for speculation than hedging.
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Thanks for the clarification.
Are Spot FX actually "one day" forward contracts that are based on buying the other currency on a 1:100 leverage and being exposed to any change in conversion rate? If so, I don't see it as a hedge but rather as a speculation...

Also, the other side of the trade for both Spot FX and Forward FX seems to be a certain dealer so that there is a counterparty risk -- if the dealer goes bankrupt (which is not an unimaginable scenario) then you may not see your money. However, in futures FX which are traded through central exchange there is almost no counterparty risk, since the other side of every trade is the exchange's clearing firm. Is it correct?
 
Quote from dragonman:

Thanks for the clarification.
Are Spot FX actually "one day" forward contracts that are based on buying the other currency on a 1:100 leverage and being exposed to any change in conversion rate? If so, I don't see it as a hedge but rather as a speculation...

Also, the other side of the trade for both Spot FX and Forward FX seems to be a certain dealer so that there is a counterparty risk -- if the dealer goes bankrupt (which is not an unimaginable scenario) then you may not see your money. However, in futures FX which are traded through central exchange there is almost no counterparty risk, since the other side of every trade is the exchange's clearing firm. Is it correct?
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You are right on all these issues. Every choice has good and bad parts.
 
Quote from drm7:

You are right on all these issues. Every choice has good and bad parts.
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If I transfer USD to EUR through IB account, do I actually make a FX spot transaction and therefore I am fully exposed to IB's credit risk (and I assume this is not insured under the FDIC deposit insurance)?
 
If you trade spot through Interactive Brokers, you settle overnight, so you will get Euros (and can withdraw them the next day if you want.) If you buy a forward contract, you can still get your money out early, but at whatever the rate is at the time ( IB's accounts are not FDIC insured though. However, they have a very strong financial condition - if IB goes out of business, you probably have a lot worse problems to deal with!

Their customer service can probably answer your specific questions better than I can.
 
Quote from drm7:

If you trade spot through Interactive Brokers, you settle overnight, so you will get Euros (and can withdraw them the next day if you want.) If you buy a forward contract, you can still get your money out early, but at whatever the rate is at the time ( IB's accounts are not FDIC insured though. However, they have a very strong financial condition - if IB goes out of business, you probably have a lot worse problems to deal with!

Their customer service can probably answer your specific questions better than I can.
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Thanks!
 
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