Hedging overseas FX risk

[xandman]

Uhm, IB's standard setting is that you will be hedged for fx-risk.

You have 200k AUD in your account.
You buy 100k USD worth of stocks, they will lend you that amount.

So after the trade:
You have 200k AUD
You have 100k USD short (through the loan)
you have 100k USD worth or stocks

So initially no currency risk, since your short USD offsets the long USD stock. Your profit or loss will have currency risk though. This is how they treat a foreign currency asset purchase.

I think there's an option somewhere to select them to purchase the foreign currency on your behalf before the trade, or at the trade... can't remember.

So, before you start trying to hedge something, be sure what you actually have in position!

Jack makes a very important update/correction. My apologies. Please verify your brokers accounting.

 

[xandman]

Hedging cash flows and hedging the fair value of assets (particularly assets with unknown future fair value) are two very different things with the latter being much more difficult. You can die a slow death trying to hedge the notional of your foreign investment.

Assuming you actually have length in USD (you should check that as mentioned above):

Gold is inversely correlated with USD and positively correlated with AUD so your USD investment in gold is already a hedge with the beta of your gold investment (in AUD) less than the beta of gold (in USD).

With my two points above, I would do nothing from a FX hedging perspective.

Agree with unhedged FX exposure for aggressive foreign investments. I think it is best used for foreign fixed income investments than are meant to fund local currency denominated liabilities. Equity returns are simply unpredictable.

Though, I would be more inclined to recommend he dump the foreign denominated gold investments completely and invest locally unless he doing some kind of arbitrage. He can simply trade currencies to acquire a desired currency exposure.

 

[Metamega]

Just curious however why you bought US listed etfs. Surely AUS has some etfs that track similar products. The volume might be crap for day trading but for buy/hold you should get a decent price.

 

[vaffab]

Just curious however why you bought US listed etfs. Surely AUS has some etfs that track similar products. The volume might be crap for day trading but for buy/hold you should get a decent price.

No not really. There are plenty of domestic funds and of course S&P 500 trackers but not too much of specific foreign markets.

 

[vaffab]

Uhm, IB's standard setting is that you will be hedged for fx-risk.

You have 200k AUD in your account.
You buy 100k USD worth of stocks, they will lend you that amount.

So after the trade:
You have 200k AUD
You have 100k USD short (through the loan)
you have 100k USD worth or stocks

So initially no currency risk, since your short USD offsets the long USD stock. Your profit or loss will have currency risk though. This is how they treat a foreign currency asset purchase.

I think there's an option somewhere to select them to purchase the foreign currency on your behalf before the trade, or at the trade... can't remember.

So, before you start trying to hedge something, be sure what you actually have in position!

Thanks JackRab but I don't think mine account if FX hedged. My paper loss around $80 but paper FX loss two times that. Can't be hedged.

 

[vaffab]

Agree with unhedged FX exposure for aggressive foreign investments. I think it is best used for foreign fixed income investments than are meant to fund local currency denominated liabilities. Equity returns are simply unpredictable.

Though, I would be more inclined to recommend he dump the foreign denominated gold investments completely and invest locally unless he doing some kind of arbitrage. He can simply trade currencies to acquire a desired currency exposure.

I've sold my GLD exposure and bought some local gold ETF. Cheers.