Spot Forex Spread/Hedge

Quote from hermittrader:

pardon me, you have previously said that

long eur/usd + short gbp/usd = long eur/gbp

now you are saying they are not the base same size?

so the long eur/usd + short gbp/usd = long eur/gbp still valid?

or to make it more transparent

long 1unit eur/usd + short 1unit gbp/usd = long 1unit eur/gbp still valid?

your statement "they are not the base same size" seem to tell me that long 1unit eur/gbp is not equal to long 1unit eur/usd + short 1unit gbp/usd.

i should feel that readers following this thread could benefit from this too.
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My mistake there. Sorry, opened my mouth before thinking.

The only explanation I can see for you having a small profit on long eur/usd, short gbp/usd, and short eur/gbp is that the trades were nore xecuted simultaniously. Even a few seconds between executions could have made the difference.

Another small detail is that spreads may be different on the pairs.

In any case, long eur/usd + short gbp/usd + short eur/gbp = neutral exposure and is synomym of giving free spreads to the dealer.

Sorry for my previous hasty & erronous response.
 
Quote from traderjb:

I'm curious here, how many units are you both using in your trade? Also, are you actually earning any interest on this trade? It must be minuscule at best, what you are making on interest on your synthetic long eur/jpy trade must be offset by your short real eur/jpy position, no?
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the question on how many units used should be be made reference to whether

long 1 unit eur/usd + long 1 unit usd/chf = long 1 unit eur/chf
or
long 1 unit eur/usd + short 1 unit gbp/usd = long 1 unit eur/gbp
or
long 1 unit gbp/usd + long 1 unit usd/chf = long 1 unit gbp/chf

a lot of times, questions often raised on " why not do a long eur/chf instead of long eur/usd and long usd/chf?" because its the same as many have thought.

the question now is a spread trade of long eur/usd + long usd/chf, is it the same as long eur/chf? it seem they are the same in mathematical terms seen on paper, but are they the same in real trade? more important, if they are not the same, why is it so?

personally i think that is the basis of spread., but i no gurus of this fx mechanics. and i believe readers will continue to benefit from such discussion.
 
Quote from hermittrader:

the question on how many units used should be be made reference to whether

long 1 unit eur/usd + long 1 unit usd/chf = long 1 unit eur/chf
or
long 1 unit eur/usd + short 1 unit gbp/usd = long 1 unit eur/gbp
or
long 1 unit gbp/usd + long 1 unit usd/chf = long 1 unit gbp/chf

a lot of times, questions often raised on " why not do a long eur/chf instead of long eur/usd and long usd/chf?" because its the same as many have thought.

the question now is a spread trade of long eur/usd + long usd/chf, is it the same as long eur/chf? it seem they are the same in mathematical terms seen on paper, but are they the same in real trade? more important, if they are not the same, why is it so?

personally i think that is the basis of spread., but i no gurus of this fx mechanics. and i believe readers will continue to benefit from such discussion.
More...

First off, I would be unwilling to call any of those trades a real "spread". FX is unlike other financials or commodities in so far that 1 pair + another pair with a common numerator or denominator will just transfer your net exposure to another pair.

Second, yes, whatever you "see on paper" does materialize in a real trade :) FX is a very pure and very mechanical market.

In order to make long eur/usd + long usd/chf be perfectly equal to long eur/chf, you must first bring things down to their common denominator (base currency).

So, if you want to look at things from a usd point of view, you will have to translate usd/chf into chf/usd. This is simple grade 8 math and is simply obtained by dividing 1 by the market rate. For example, to obtain "usd/chf";

usd/chf = 1 divided by the present rate of chf/usd.

... now you can compare "apples to apples" and analyse eur/usd with "chf/usd" (instead of "usd/chf").

...FX mechanics is just grade 8 math involving fractions.
 
Quote from ParisJOM:

First off, I would be unwilling to call any of those trades a real "spread". FX is unlike other financials or commodities in so far that 1 pair + another pair with a common numerator or denominator will just transfer your net exposure to another pair.

Second, yes, whatever you "see on paper" does materialize in a real trade :) FX is a very pure and very mechanical market.

In order to make long eur/usd + long usd/chf be perfectly equal to long eur/chf, you must first bring things down to their common denominator (base currency).

So, if you want to look at things from a usd point of view, you will have to translate usd/chf into chf/usd. This is simple grade 8 math and is simply obtained by dividing 1 by the market rate. For example, to obtain "usd/chf";

usd/chf = 1 divided by the present rate of chf/usd.

... now you can compare "apples to apples" and analyse eur/usd with "chf/usd" (instead of "usd/chf").

...FX mechanics is just grade 8 math involving fractions.
More...

i guess the best is to use one demo account to show that they are the same. since it is mathematical, definetly can be work out, be it usd/chf or chf/usd. there are many cross pairs to work on, so all of us can share the results whether it is the same.

i have also done a few more trade on this topic, probably i would add some more crosses with synthetic trade to see if the end result is the same as grade 8 maths
 

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Quote from hermittrader:

i guess the best is to use one demo account to show that they are the same. since it is mathematical, definetly can be work out, be it usd/chf or chf/usd. there are many cross pairs to work on, so all of us can share the results whether it is the same.

i have also done a few more trade on this topic, probably i would add some more crosses with synthetic trade to see if the end result is the same as grade 8 maths
More...

If you are just looking for an intelectual execise on a demo account, I hope this will help your understanding of FX mechanics. But please, for your account's sake, do not think you make any money doing this ! All you are doing is giving free money (spreads) to your dealer and tying up margin for nothing.

From a financial perspective, this thread should be entitled "how to gaurantee free profits for your dealer while prohibiting yourself from any hope of a gain".
 
Quote from ParisJOM:

If you are just looking for an intelectual execise on a demo account, I hope this will help your understanding of FX mechanics. But please, for your account's sake, do not think you make any money doing this ! All you are doing is giving free money (spreads) to your dealer and tying up margin for nothing.

From a financial perspective, this thread should be entitled "how to gaurantee free profits for your dealer while prohibiting yourself from any hope of a gain".
More...

pardon me, but u r getting away from the topic.

we are trying to find out if the theoretical proven whether it will be the same when trading it

ie. long 1 unit of eur/usd + short 1 unit gbp/usd = long 1 unit eur/gbp

such trades can be applied easily on demo account for the purpose of sharing with fellow readers reading this topic.
 
This has been a quite interesting post on the notion of hedging a spot FX position.

My question is, "Why would one want to hedge in the first place?"

Rhetorical question? Not really. Hedging is insurance. As a spot FX "SPECULATOR", one wants exposure to capture potential profits. The only reason to hedge is to protect against potential losses. If one seeks to lessen their losses, take a much smaller position. If one seeks to not lose, don't play :) . Now, if you're a CFO trying to minimize the risk of currency fluctuations in foreign operations, hedging makes perfect sense.

Perhaps what some people are seeking by holding different pairs is customizable exposure through the various correlations. My suggestion would be to find a broker that allows for a flexible lot size; this way you're not paying multiple spreads to hold multiple pairs that only offset each other. To my knowledge, Oanda and GFT both provide this, GFT with their Base10 trading. Am I suggesting to not hold multiple pairs, nope. The other evening I was long EUR/USD when a story came across the wire that N. Korea may have tested the bomb; jumped right in and shorted the Yen.

Why, to INCREASE exposure.

Happy Trading.
 
Quote from hermittrader:

pardon me, but u r getting away from the topic.

we are trying to find out if the theoretical proven whether it will be the same when trading it

ie. long 1 unit of eur/usd + short 1 unit gbp/usd = long 1 unit eur/gbp

such trades can be applied easily on demo account for the purpose of sharing with fellow readers reading this topic.
More...

Whats next ? are we going to start a thread that is trying to prove that 1+1=2 ??
 
Well I must say that Paris may be on to something here. I've held that trade I mentioned and the results have not been all that well. That one synthetic long did not offset my synthetic short in any way. One was either too slow to react or the reaction was not of equal proportion. Perhaps there is something here, but right now I am not sure. As a side note, a synthetic long did move about 80-90% of what the real thing did, though this is a naked observation, nothing scientific.
 
This thread is even more interesting than the one I started on
long eur/usd SPOT FX and short eur/use currency futures for the
40+ pips spread :p :p :D
 
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