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How to hedge currency risk as a retail?
- Thread starter Remiraz
- Start date
"The foreign currency might not be offered or might have huge spreads. (50-100 pips)" Aussie?! You're a funny guy.
Why don't you just take out an AUD-denominated mortgage, instead of presumably using your USD liquid assets? Now you are long the real estate asset and short the local currency, which is exactly what you want for a properly structured currency hedge.
Invest those USD assets however you normally would. No need to deposit any funds with a forex dealer or use leverage. You can't completely escape the implied carry cost, but at least you've swapped one short-term floating rate (AUD) for a much longer-term (5-year), say, equity portfolio-type variable return rate (USD), rather than the guaranteed lower short-term floating rate (USD).
Why don't you just take out an AUD-denominated mortgage, instead of presumably using your USD liquid assets? Now you are long the real estate asset and short the local currency, which is exactly what you want for a properly structured currency hedge.
Invest those USD assets however you normally would. No need to deposit any funds with a forex dealer or use leverage. You can't completely escape the implied carry cost, but at least you've swapped one short-term floating rate (AUD) for a much longer-term (5-year), say, equity portfolio-type variable return rate (USD), rather than the guaranteed lower short-term floating rate (USD).
Quote from Remiraz:
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)
Well if you buy real estate in AUD, you should at least wait for a .89 retest before you short the AUD.
It is a negative carry trade (slightly), so you will lose 1%/yr doing this.
Quote from crgarcia:
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.
haha...
"I don't think anybody could predict (successfully) where any currency will be 5 days from now" holds just as true.
Quote from ETW77:
did a quick calc on bloomberg...bit expensive, but may be worth the piece of minf ...5-yr ATM put going for about 9%...would expected the broker to tack un a bit to that though..good luck
You will likely pay an exceedingly high premium for such an option and encounter substantial transaction costs on the position. Even several months out, currency options markets are far too illiquid to make sense to trade.
Just my $.02.
yeah like I said was trading at about 18K (ex-the tack up in vol and commission) ...honestly not bad for a 5-yr protection with aussie at these levels...Don;t know what else you would adcvocate when your access to products is so limited like in retail. Obviously the bucket shops offers some things, but wouldn't trust going out six months with them much less 5 yrs
Quote from ETW77:
yeah like I said was trading at about 18K (ex-the tack up in vol and commission) ...honestly not bad for a 5-yr protection with aussie at these levels...Don;t know what else you would adcvocate when your access to products is so limited like in retail. Obviously the bucket shops offers some things, but wouldn't trust going out six months with them much less 5 yrs
A quick valuation does show a 5-year ATM put for about 18k, as per the Bloomberg screen below, but who is actually going to sell you this option at 18k? Given the absurd illiquidity on anything longer-dated than 3 months on FOP's, I can't imagine that going through any retail brokers could produce a reasonable rate on a 5-year put.
If you think that currency hedging is worth 18k over 5 years, then sure, it makes sense. But I highly doubt that you would actually get such a price from anywhere.
Corrections on my assertions are more than welcome.