Shorting stock in non-base currency - beginner trying to understand the FX mechanics of short sales

[pun1]

Hi,

I have a very beginner question that relates to stock. I haven't found a beginner section. Please re-route my post to the respective forum section or to Stock, I do not know what the best practice of posting is and apologize for any confusion.

I recently shorted on IB a USD stock, while my base currency is CZK. I later clicked on "close all non-base currency balances". My goal is to have no exposure to USD at all, and if, then to effectively short the USD, as I believe my base currency will appreciate (let us not discuss this, just my preference).

My question is, how exactly the short mechanisms work and if I decide to close my short position in a couple of months to years, what kind of FX rate will affect me? I am truly looking into understanding what happened once I shorted the stock - I understand I borrow, pay a fee for that, but have no idea how the FX works and how it will be settled once I close the position (ie effectively buy the stock back for its future value, I expect, in USD).

Looking forward to hearing from you.

pun1

 

[312]

Because you're long 0 USD, when you close your position you're gonna be short USD by the amount that costed you to close. Then you can choose to keep your short USD balance or close it, presumably at the spot rate.

This means that in addition to short the stock you're currently short USD as well, cause you're gonna have to buy some USD eventually to close your USD short balance upon repurchasing the short.

In order to have no USD exposure at all, you would have to consistently be long USD in the amount of the mark-to-market of your short stock.

 

[Martinghoul]

It's quite simple...

Every day, at the close, you may have some USD exposure, which is the difference between the mark-to-market of your USD-denominated stock position and the USD cash balance. Your daily FX PNL in CZK will be equal to the daily move in the USDCZK exchange rate multiplied by the amount of USD exposure you have (you may also have to pay IB to roll your spot FX positions). You may choose to "flatten" your USD exposure every single day and at the time when you unwind the trade. In that case, you'll be just reversing both legs of the FX-hedged trade.