FX hedging using futures or...

R

rucola

Hi everyone.
I need to do the following and trying to find out what's the best instrument/way of doing it.

I have EUR that I want to convert to USD. I need to hedge fx risk so that in say 1yr when I convert the USD back to EUR I won't lose on the exchange rate if the EUR appreciates vs the USD in the meantime. I don't have an exact date when I will re-convert the USD to EUR... but it won't be anytime soon.

what's the best way to achieve this? it would help if someone could list the steps. I've never used fx futures before.

thanks
 
rucola said:
Hi everyone.
I need to do the following and trying to find out what's the best instrument/way of doing it.

I have EUR that I want to convert to USD. I need to hedge fx risk so that in say 1yr when I convert the USD back to EUR I won't lose on the exchange rate if the EUR appreciates vs the USD in the meantime. I don't have an exact date when I will re-convert the USD to EUR... but it won't be anytime soon.

what's the best way to achieve this? it would help if someone could list the steps. I've never used fx futures before.

thanks
More...

why would you want to make offseting trades ? Why would you trade at all in this scenario ?

you haven't given enough information to give any reasonable advice.
 
The easier option would be to just purchase EUR/USD through an FX broker with a nominal value equal (or as close as possible) to the value of your Euro currency. That way you don't have to worry about rolling over each time the futures contract expires and more stringent margin requirements. You will also get higher leveredge with an FX broker so you can hedge with less capital.

You're selling Euros and purchasing USD so you want to do the opposite to hedge the transaction. i.e. Purchase Euros and sell USD which means you will enter a long EUR/USD position. If the Euro appreciates in value the profit you generate through the FX broker will offset the loss while holding the USD and vice versa if the Euro depreciates in value.
 
Last edited by a moderator:
tsfx said:
why would you want to make offseting trades ? Why would you trade at all in this scenario ?

you haven't given enough information to give any reasonable advice.
More...

I have a client that has Euros sitting in a checking account. for whatever reason, he doesn't want to hold Euros (I think it's because those Euros are sitting in a bank that is not the safest in the world and because the bank is in a European peripheral country where, due to coronavirus deficits, he's scared the govt will tax some of the balances in checking accounts). He wants to have USD. so he wants to convert these Euros to USD and have these USD sit in an account temporarily (he doesn't even care about investing them... he wants them as liquid as possible).
However he wants to be hedged so that when the time comes to re-convert the USD back to EUR he wants to be no better/worst off than when he had the euros in the first place. essentially he wants to hedge against EUR appreciating vs the USD while he's holding USD.
the only way I thought of doing this is via futures rolling them every 3 months, using the USD liquidity for margin requirements so that I'm not paying any interest to the broker.
any other smart way of doing this? thanks
 
rucola said:
I have a client that has Euros sitting in a checking account. for whatever reason, he doesn't want to hold Euros (I think it's because those Euros are sitting in a bank that is not the safest in the world and because the bank is in a European peripheral country where, due to coronavirus deficits, he's scared the govt will tax some of the balances in checking accounts). He wants to have USD. so he wants to convert these Euros to USD and have these USD sit in an account temporarily (he doesn't even care about investing them... he wants them as liquid as possible).
However he wants to be hedged so that when the time comes to re-convert the USD back to EUR he wants to be no better/worst off than when he had the euros in the first place. essentially he wants to hedge against EUR appreciating vs the USD while he's holding USD.
the only way I thought of doing this is via futures rolling them every 3 months, using the USD liquidity for margin requirements so that I'm not paying any interest to the broker.
any other smart way of doing this? thanks
More...

Impressive, you go from novice to expert in a single post. That certainly changes the context.

Enjoy the paperwork, tedious wire transfers, roll overs and margin calls for your single currency transaction hedge.

Sounds like you know what you want though so we'll leave you with it.
 
Last edited by a moderator:
What did you decide to do? Not sure why you insist on futures. Why not trade an FX swap and keep rolling the fwd leg over at maturity?
 
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