FX risk and Hedging funds sent to a US broker

A

Adam777

I'm from Australia and I'm enquiring about hedging any foreign exchange risk when funding a US brokerage account (held in USD).

The AUD has been in a range between $0.63-1.10 over the last decade, and it's currently at about $0.76, so if the AUD goes back up, the value of a new US brokerage account can only go down.

https://www.dailyfx.com/aud-usd

I wondering if you hedge an account by simply buying 1x micro AUD/USD (M6A) contract on the CME per $10,000 AUD sent to the US brokerage account?

http://www.cmegroup.com/trading/fx/...tract_specifications.html?marginsTab=OUTRIGHT
 
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Adam777 said:
I wondering if you hedge an account by simply buying
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Shudder... :wtf:

Right, let's get something absolutely clear ...

There's nothing "simply" about hedging, especially forex !

a) Are you sure hedging is right for you ? I know many people, including those running fairly hefty portfolios who don't hedge a penny. They hedge "naturally" through a balanced portfolio, but they don't go out of their way to do forex or derivative trades just to "hedge".

b) Remember, as well as the complexity of "getting it right", there are also costs you'll be incurring in relation to the hedge. Do your sums, make sure the costs make it a worthwhile endeavour and risk to take ! This is especially the case if you're trading/investing at Retail level.

c) If you are sure (or if you're just hell-bent on hedging), then do yourself a favour, read up on forex and derivatives, and spend some time doing paper trading before going live.

But whichever way, you can absolutley forget about buying and forgetting about a "1x micro AUD/USD (M6A) contract on the CME". Hedging is not buy and forget.
 
wintergasp said:
You can keep AUD in a AUD-based account with a US brokerage entity.
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Thanks Wintergasp. Every time I buy or sell CME products I would lose the FX bid ask spread. I'm guessing this adds up over time. I know you know more than me as you've been doing this a long time, so you're probably right - I'm just trying to get my head around what to do. ... unless I go for trades way larger than the 2x fx bid ask spread for getting in and out of each us based position ... very expensive.


Tim Smith said:
Shudder... :wtf:
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Thanks Tim for your reply. ... Yes I'm just trying to find a solution as just closing my eyes and sending my $ to the US could cause me to lose up to a third of my account over time. Exchange rates just change so much and I'm guessing many new overseas retail traders don't think about it. I'm just not sure what to do.

Replying to the above:
a. I'm too new to have a balanced portfolio.
b. and c. as 1x M6A contract represents $10,000 AUD, I was also asking if is was the correct calculation to hedge/balance $10,000 AUD sent to the US, then keep rolling the contract. I'm not hell-bent, I'm just asking as I don't know.

As you suggested I will keep reading and paper trading, and also contact some brokers as I'm sure they get this question all the time.
 
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Adam777 said:
Thanks Wintergasp. Every time I buy or sell CME products I would lose the FX bid ask spread. I'm guessing this adds up over time. I know you know more than me as you've been doing this a long time, so you're probably right - I'm just trying to get my head around what to do. ... unless I go for trades way larger than the 2x fx bid ask spread for getting in and out of each us based position ... very expensive.




Thanks Tim for your reply. ... Yes I'm just trying to find a solution as just closing my eyes and sending my $ to the US could cause me to lose up to a third of my account over time. Exchange rates just change so much and I'm guessing many new overseas retail traders don't think about it. I'm just not sure what to do.

Replying to the above:
a. I'm too new to have a balanced portfolio.
b. and c. as 1x M6A contract represents $10,000 AUD, I was also asking if is was the correct calculation to hedge/balance $10,000 AUD sent to the US, then keep rolling the contract. I'm not hell-bent, I'm just asking as I don't know.

As you suggested I will keep reading and paper trading, and also contact some brokers as I'm sure they get this question all the time.
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Hmmm it's not about the hedging cost but just... there's no reason why you may want to hedge using futures if you can keep a AUD denominated account. You would have hedging problems if you were holding a portfolio of USD denominated securities.
 
If you only want to hedge your USD balance at your broker, its actually quite simple. By sending 10K AUD to your brokers USD account you are short 10K AUD and long ~7600 USD (aprox. with current exchange rate). So as a hedge you could just buy 10K AUD/USD in spot fx and adjust from time to time depending on your PnL. This trade should have also positive carry at the moment (depending on how bad your fx broker screws you on swaps).
 
wintergasp said:
You would have hedging problems if you were holding a portfolio of USD denominated securities.
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I guess CME Eurodollar Spreads count as US denominated securities ... that's all I'm interested in at the moment. But if I don't need to hedge as Tim and yourself mentioned then that's even better.

Tim Smith said:
They hedge "naturally" through a balanced portfolio
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I really need to start reading up on this.

Pippi436 said:
...
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Thanks! I'm going to have to read up on spot vs futures.
 
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Adam777 said:
I guess CME Eurodollar Spreads count as US denominated securities ... that's all I'm interested in at the moment. But if I don't need to hedge as Tim and yourself mentioned then that's even better.


I really need to start reading up on this.



Thanks! I'm going to have to read up on spot vs futures.
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No CME Eurodollar Spreads are futures which is a derivative not a security. A security is a stock or a bond, you need to fully fund it (not margin based), hence you're holding USD with your investments.

Any kind of derivative is usually margin-based so your USD exposure is only on your P&L which is negligible.
 
wintergasp said:
No CME Eurodollar Spreads are futures which is a derivative not a security. A security is a stock or a bond, you need to fully fund it (not margin based), hence you're holding USD with your investments.

Any kind of derivative is usually margin-based so your USD exposure is only on your P&L which is negligible.
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I was thinking about this today. You're not really buying anything with futures (yes wrong terminology), and you'd just have USD exposure on: data fee, cme fees & commissions, and P&L which creeps up slowly (yes negligible compared to the total account). Thank you for confirming this. As you said, if it was stock etc, or I guess even exceptionally high cme fees or profits (this isn't me), then I would need to calculate a hedge as per what Pipi436 mentioned, as per:

http://www.cmegroup.com/trading/fx/...-rate-risk-with-cme-fx-futures-cad-vs-usd.pdf
 
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