Would you rather hold your currency in your pocket or RISK exchanging(buying) something
else with it? As soon as you take that risk and make an exchange you are "selling", shorting, the currency in your pocket and buying , long , the other asset.
Draw a green horizontal line on top of a red horizontal line to model the long and short respectively to represent a flat opening position.
Tommorrow the value of both will change . Extend the green and red line. That is now a spread where the green line must remain above the red to remain profitable. For example, both lines can fall but if the green line falls less than the red line, the spread widens and becomes more profitable.
Now, draw two spreads with real values. Use SPY and FXE for one spread and SPY and UUP for the second spread. Chart the daily percentage changes of each spread for a week.
Week ending , one spread will be wider, a higher net percentage than the other.
It would have been better to have (sold short) that currency to purchase SPY with that currency rather than the other.
It is clear to see on the drawing that it is good for the sold, shorted "leg" to decrease in balue and the green long leg to increase in value ideally, simultaneously.
It is informative , for exmple, to see that if SPY has increased by 3% and UUP has increased by 2%, that effectively the "spread" is only 1% wide.
Assuming you have idle cash in your account your account would be better off if you hedged
Your short effective USd leg with a seperate , equal, long UUP position to offeset that 2% loss.
This is a different way of thinking. Someone else may have similarly taken a long SPy and long
uUP positions and not thought of as a hedge.
Yup, UUP is uup/fxe . FXE is fxe/uup . EUO is iverse FXE so EUO is uup/fxe which is the same as
UUP.
Forex traders buy or sell EUR.USD
Thanks for the instructive explanation! I will have to learn much more about currencies and their relationship- large void space in my grasp of the economic forces that are at work.
As I think I understand it - as a foreign currency decines in value against the US Dollar, it makes it's exports less expensive - relativey, and so a strong US dollar allows US consumers and businesses to purchase more of the products of the countries whose currencies are weakening. Is that essentially accurate?
A strong dollar makes US goods more expensive- so a strong dollar negatively affects
US exporters- as their products are getting more expensive- to purchase- requiring more Yen, Rubles, Euros.
For US based businesses with global exposure- their products manufactured and sold outside of the US markets would be based on the cheaper currency of that country of mfg, so the weaker currency value relative to the dollar would reduce the profitibility of those goods sold. Is that accurate?
DXJ - reportedly the hedged ETF - a weaker Yen prompting a market rise for the benefit of japanese based exporters. Imported goods are more expensive for consumers to purchase-requiring more Yen .
Hedj- Wisdom Tree
" he greatest challenge with Europe may not be its equity markets, but the euro itself. At WisdomTree, we believe the many global brands headquartered in Europe are still attractive investment opportunities. HEDJ offers you a way to access their growth potential, while hedging exposure to the euro."
DXGE- German/Euro hedge
Wisdom Tree -"You drive their cars, access their healthcare products, and—whether you realize it or not—use their electronics. But are you investing in German companies? Germany is not only the engine of European Growth, it has also been a resilient force throughout the eurozone crisis. And, it's export based economy looks well positioned to benefit from a broader recovery. WisdomTree Germany Hedged Equity Fund (DXGE) offers you a way to capitalize on the growth potential of these tremendous exporters while hedging out the effects of the euro—and potentially boosting your returns."
Thanks again for your informative input-
Plenty to learn about- Europe is up over 1% - so I will assume both HEDJ & DXGE will be higher today.
I will look at both DXGE- and HEDJ -DXGE made 3 pullbacks recently, while HEDJ has been trying to move up- Perhaps this is all on Greece's new accords being worked out?
I would be more inclined to trust in Germany for growth than the wider European countries.
