Spot Forex Spread/Hedge

I would be also interested in seeing how a trade utilizing FX spot positions offset by a corresponding FX futures position would work out. Of course, the price on the futures would not really be the same as the spot. On IB, I think one would need about $2500 for the spot, and lets say its the Yen (Assuming that this was Yen-Dollar carry trade) $2430 for the futures contract.

Another angle would be to offset that Yen trade with Currency Options on the ol' Philly Exchange. The current contracts have a worse open interest than say the CME lumber contract! I called the folks there today (doing a little homework) to get the 411 on this. The guy told me that mainly the contracts traded now are for institutional, meant for physical exchange. But, he told me, they have a cash contract coming out in a month or so. He wasn't sure if ultimately it would be electronic, but he says open cry for sure. If its the same specs, you'll need 2 contracts cause they are half the size of what a futures contract currently covers. Don't know what you'd pay for 'em, cause there are now prices for the cash contracts. But hey, maybe IB or Oanda will let you use 'em.
 
Quote from traderjb:

I would be also interested in seeing how a trade utilizing FX spot positions offset by a corresponding FX futures position would work out. Of course, the price on the futures would not really be the same as the spot. On IB, I think one would need about $2500 for the spot, and lets say its the Yen (Assuming that this was Yen-Dollar carry trade) $2430 for the futures contract.

Another angle would be to offset that Yen trade with Currency Options on the ol' Philly Exchange. The current contracts have a worse open interest than say the CME lumber contract! I called the folks there today (doing a little homework) to get the 411 on this. The guy told me that mainly the contracts traded now are for institutional, meant for physical exchange. But, he told me, they have a cash contract coming out in a month or so. He wasn't sure if ultimately it would be electronic, but he says open cry for sure. If its the same specs, you'll need 2 contracts cause they are half the size of what a futures contract currently covers. Don't know what you'd pay for 'em, cause there are now prices for the cash contracts. But hey, maybe IB or Oanda will let you use 'em.
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No real difference between FX spot & futures. The quotes may look different but that is just because the interest is worked into the contango/backwardation in the futures prices.... there is absolutely no arbitrage to be had between fx futures and FX spot.
 
Quote from pubison:

Lol. If you want safe FX is not the way to go....
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Well, I never said I was looking for gaurantees ... but certain suicide is another thing. :)
 
Quote from ParisJOM:

No real difference between FX spot & futures. The quotes may look different but that is just because the interest is worked into the contango/backwardation in the futures prices.... there is absolutely no arbitrage to be had between fx futures and FX spot.
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You are correct, but what if one simply wanted to protect themselves against price movement? I agree, if one converted the price of the futures to their spot price format, it would be completely different price level to the actual spot price. I will be open and admit that I do not know the correlation between the spot and futures, meaning that if X moves 1%, does Y move the same amount?

Say one were to purchase 125,000 USD/JPY at a given price or legging within a short period of time. Could one simply purchase the futures contract (JPY/USD priced)? That way if the spot yen gained versus the dollar by say 300 pips, perhaps there would be a move of 90% of that on the otherside with that futures contract? Once again, it would not move from the same price base, but maybe protect yourself from the change? :confused:
 
Quote from traderjb:

You are correct, but what if one simply wanted to protect themselves against price movement? I agree, if one converted the price of the futures to their spot price format, it would be completely different price level to the actual spot price. I will be open and admit that I do not know the correlation between the spot and futures, meaning that if X moves 1%, does Y move the same amount?

Say one were to purchase 125,000 USD/JPY at a given price or legging within a short period of time. Could one simply purchase the futures contract (JPY/USD priced)? That way if the spot yen gained versus the dollar by say 300 pips, perhaps there would be a move of 90% of that on the otherside with that futures contract? Once again, it would not move from the same price base, but maybe protect yourself from the change? :confused:
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trader jb,

You must understant that the futures prices are quoted at a slightly different price than the spot price because the interest is included in the futures price ("contango" & "backwardation"). Once you credit/debit the interest to/from the spot price you will end up with the same price as the futures price. Otherwise said, futures FX price = spot price + interest credit/debit for days remaining until expiry of the futures contract.

Just look at december eur/usd .... it quotes higher than eur/usd spot price. Now, if you add the interest that spot eur/usd pays/costs (depending which side you are on) for about 60 days (ie until december expiry), you will have a figure that is almost perfectly in line with present december eur/usd futures price.

Clear ?

in regards to pairs that are "inverted" on futures quotes (such as jpy), just do : 1 divided by usd/jpy spot price + interest until expiry = jpy/usd futures price

...always just divide 1 by price to invert the pair.

Clear ?

Spot & futures FX prices are 100% correlated... NO ARBITRAGE POSSIBLE.

If you want to "protect" a spot FX position, either just close it out (with a stop), or use options. However, options can get expensive and messy ... better to just take outright FX positions with hard stop.

Don't even think of touching an options contract untill you master options theory ! Options are like jet fighters... would you "test drive" a jet fighter before learning how to pilot an aircraft ?
 
Greetings, I absolutely love this method. Of course you'll find many who say how dangerous it is. Much like when Edison was trying to invent the lightbulb and many said how stupid he was.

Personally, I use a EUR/USD, USD/CHF long trade, using 80% of my margin and doing well with it. Of course there are those who say all I'm doing is betting that EUR/CHF will rise. Interesting though that when EUR/CHF drops I still profit.

Anyway, about your post here, which direction do you enter the market? Long or short?

Quote from pubison:

Very interesting topic!

I have been hedging for a few months now and am doing pretty well at it. I just started a new test account after trying many different combos.

The pairs I use now are USD/JPY, USD/CHF, AUD/USD, NZD/USD. Heres my setup....

I'm testing with a Demo on FXSol with a $10k account.
400 leverage: I use this leverage because it gives me more free margin.
10,000 lot size: With this lot size if i want a 100k position i just need to use 10 lots and i can adjust my positions by adding or closing 1 or 2 of the smaller lots.

I enter the market pretty much at random with 10 lots of each pair then I wait. I wait till the total value of the open positions is = about $100 to $500 in the green then I close all of them.

If the total value of the positions is about $500 to $800 in the red after about 6hrs or a day I open up another 10 lots of each pair and wait till i'm in profit.

I keep doing this till i am in profit or till i have a max of 50 10k lots open for each pair.(which happens hardly ever) If this does happen or if i do have a lot of open positions i just sit on it and rake in a very good amount of interest. I would say on average the $10k test accounts gain around $500 - $3000 a week.

The current test account i'm using that has been open for about 2 week increased by 48%. Not to shabby.

I have been hedging like this for a while and FOR ME its working great.

I'll try and get the account history up soon.
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Most of the time i go long. Sometimes i'll even hedge each pair by going short on both if my account margin start to get to low. Its something you really have to try out for a while so you have a feel for what works and what does not.
 
Hi all,

it been quite some time. I started with a USD1000 mini account on the above mentioned since mid Feb 2007 (the USD 15 cut is the bank transfer commission)

I used 15-20% of the capital for margin. May enter periodically but always look at the margin against capital.

So far the return is 50% to date.

One of the concerns is the drawdown on the opening position which can hit 40% of capital. Guess this is more of a set up problem rather than market problem
 

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Hi all,

Decide to bring up this thread for further discussion.

Since 14/feb/07, my mini account is up 87%

So far there 2 situation which my trades really goes very wrong, but still it osicllate back to profit.

1st time occur during the subprime loans, almost use up to 50% of my capital, margin plus unrealised loss

2nd time is now, which is about 35% of the equity.

My entry now is progressive instead of 1 shot. Example, though i can use up 20% of equity for margin, but my entry is progressive.

Miss some good gains, but if the position goes against me, i fire 2nd round. if the trade goes further against me, i fire the 3rd round.

However, I would like to seek the opinion of some pros here can this method really works in the long run?
 
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