How to hedge currency risk as a retail?

R

Remiraz

Suppose I am an US citizen who is investing US$200,000 for the long run in a foreign country. This investment is made in the currency of the foreign country and thus I have to convert the $200k into foreign dollars.

In around 5 years' time, I want to liquidate the investment and convert the cash back into US dollars.

Any suggestions on how i can eliminate the exchange rate risk as a retail? The only thing i can think of is shorting US$200k worth of the foreign currency through a retail spot FX broker but this runs into two problems:

1) I don't trust retail spot FX brokers enough to hold an open position with them for 5 years.

2) The foreign currency might not be offered or might have huge spreads. (50-100 pips)

Any suggestions?
 
Quote from Remiraz:

Suppose I am an US citizen who is investing US$200,000 for the long run in a foreign country. This investment is made in the currency of the foreign country and thus I have to convert the $200k into foreign dollars.

In around 5 years' time, I want to liquidate the investment and convert the cash back into US dollars.

Any suggestions on how i can eliminate the exchange rate risk as a retail? The only thing i can think of is shorting US$200k worth of the foreign currency through a retail spot FX broker but this runs into two problems:

1) I don't trust retail spot FX brokers enough to hold an open position with them for 5 years.

2) The foreign currency might not be offered or might have huge spreads. (50-100 pips)

Any suggestions?
More...

To start with the cost of hedging your position, I would think almost all FX brokers offer very competitive rates compared to other financial institution. More so because FX brokers focus on low spreads to attract customers and frequent trading activity. Your one time hedge will benefit from the same competitive rates. So in this case the 'huge' spread is actually very low (you only have to incur it once).

As for the matter of trust, that is totally up to you. If you don't trust any FX broker, take your business elsewhere. Of course other offers might not be as competitive (you have to make your own cost / benefit analysis).

An alternative to neutralize the currency risk is to borrow the amount you want to invest in the local currency where you plan to make your investment. This does imply you have to borrow the investment. Because the investment as well as the return is in one and the same currency, you are not affected by currency fluctuations for the invested amount.
 
Quote from Remiraz:

Suppose I am an US citizen who is investing US$200,000 for the long run in a foreign country. This investment is made in the currency of the foreign country and thus I have to convert the $200k into foreign dollars.

In around 5 years' time, I want to liquidate the investment and convert the cash back into US dollars.

Any suggestions on how i can eliminate the exchange rate risk as a retail? The only thing i can think of is shorting US$200k worth of the foreign currency through a retail spot FX broker but this runs into two problems:

1) I don't trust retail spot FX brokers enough to hold an open position with them for 5 years.

2) The foreign currency might not be offered or might have huge spreads. (50-100 pips)

Any suggestions?
More...

use cme fx futures
 
First, you'd better compare the retail swap rates on that currency and USD, especially if this secret "foreign country" happens to be an emerging market... which is what it obviously sounds like. If you were to hedge, it may well end up costing you far more in leveraged negative interest over 5 years than any potential hedge payoff. If so, then the best advice to you would be "forget it" - willingly assume the exchange rate risk.

If interest doesn't kill you, then your "two problems" may not be problems.

For smaller funds (this qualifies) held with brokers registered, for example, with the FSA in the UK or the CIPF in Canada, you get protection again bankruptcy, among other things. Even in the US, lumping all fx dealers and brokers into one pile is... not a useful approach. Plus you could always diversify.

"Might not be offered" or 50-100 pips... well, which is it? 50-100 not only is not "huge" - it's barely a blip over 5 years, as a currency hedge premium.

CME futures - if they even exist for that pair - would have to be rolled over every 3 months, at spreads consistent with likely nearly zero liquidity.
 
there are currency ETFs that trade like a stock so you can buy or sell.....dyodd

google currency etf's and read the prospectus FULLY
 
Quote from daddyeaux:

there are currency ETFs that trade like a stock so you can buy or sell.....dyodd
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bad idea. in order for a hedge to make sense it needs to be capital non-intensive 5-10% of money down at the most. otherwise you will me merely making a trade
 
Thanks for the replies!

I didn't reveal the "foreign country" because I wanted to see what the general advice was like before receiving specific advice. To make the picture clearer: I am going to buy real estate in Australia.

AUD/USD is a liquid pair with tight spread for FX brokers, but I have my reservations regarding *ahem* "bucket shops*. Any ideas how i can take the currency risk component out of the equation? (I recognise that real estate speculation carries its own risk too)
 
do with oanda or fxcm, they have been around long enough and this diminishes your risk(although they still exist), use more leverage so you have to put less money down but there is a drawback that you must be careful you might get a margin call and have your position liquidated. or you can bet on the fall of the dollar if your position is for the long haul and not hedge
 
If your primary concern is safety of funds, some banks offer retail FX platforms too, for example ABN Amro(i think they dont take american customers tho) or Deutsche.

Keep in mind that AUD/USD shorts have negative cost of carry.
 
Quote from Remiraz:

Suppose I am an US citizen who is investing US$200,000 for the long run in a foreign country. This investment is made in the currency of the foreign country and thus I have to convert the $200k into foreign dollars.

In around 5 years' time, I want to liquidate the investment and convert the cash back into US dollars.

Any suggestions on how i can eliminate the exchange rate risk as a retail? The only thing i can think of is shorting US$200k worth of the foreign currency through a retail spot FX broker but this runs into two problems:

1) I don't trust retail spot FX brokers enough to hold an open position with them for 5 years.

2) The foreign currency might not be offered or might have huge spreads. (50-100 pips)

Any suggestions?
More...
I don't think anybody could predict where any currency will be 5 years from now, not even George Soros.

Why don't you just trade short term?
After all this is the advantage of forex: massive liquidity.

Put your money in some tbills and make some paper trades for a year, before betting your hard earned 200k.
 
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