What is a good way to hedge currency risk?

[BKR88]

Ninjatrader margin is $286 for M6E.
Futures are regulated, forex not. I would go for futures, as Forex quotes are manipulated by many brokers as they take the other side. I traded forex years ago. They cheat with the pips as they know your position.

1-Currency position is just a hedge so won't be opening/closing regularly.
2-Risk is with the broker, not the market. IBKR has a $22B market cap and $232B AUM. Not a big concern IMO.

 

[BKR88]

From what I understand, the OP is holding EUR and IBKR is extending buying power in USD under REG-T for US cash equity holds and he is paying the IBRK margin and borrow rates in USD.

Therefore, he would need to gain substantial EUR exposure to offset the FX risk on an as needed basis depending on the portfolio leverage amount.

The choices are long FX futures on globex, or short USD/EUR on a leveraged basis incurring the swap fee. I have no idea how this will work since I didn't even know IBKR will extend margin loan against EUR collateral...lol.

Seems like he will have to maintain the hedge against dividends/margin/borrow and gross exposure in dollar denominated assets.

Interesting discussion.

Definitely gets a bit complicated if he wants to be 100% hedged for every $$ exposure.
IMO he'll just get an approximate hedge and be OK with that. May need to adjust at times.
My comments were just comparing futures to spot forex. No difference because of swap fees.

 

[solidme]

From what I understand, the OP is holding EUR and IBKR is extending buying power in USD under REG-T for US cash equity holds and he is paying the IBKR margin and borrow rates in USD.

Therefore, he would need to gain substantial EUR exposure to offset the FX risk on an as needed basis depending on the portfolio leverage amount.

The choices are long FX futures on globex, or short USD/EUR on a leveraged basis incurring the swap fee. I have no idea how this will work since I didn't even know IBKR will extend margin loan against EUR collateral...lol.

Seems like he will have to maintain the hedge against dividends/margin/borrow and gross exposure in dollar denominated assets.

Interesting discussion.

I am holding EUR and IBKR make me buy us stocks with a margin loan so I don’t have to convert to USD, so I am now paying borrowing and margin costs. While this system is convenient for short term trading, I am now holding positions for weeks this make me also subject to Currency risk .
So I decided to convert my capital in USD to eliminate the borrowing costs, but I want to hedge my principal against currency risk to keep in simple.

 

[HobbyTrading]

That's very interesting ifo, I guess the M6E contract also mentioned by @Real Money will take 1/10 of the capital compared to 6E and give me lot of flexibility.

You would have to roll over your M6E position every quarter (i.e. 4 times per year). The daily trade volume on the new contract is rather low until a few days before the old contract expires. The same applies to the bid/ask spread: it tends to be a bit wider on the new contract until the last few days before the old contract expires. So you need to have a proper reminder on your calendar to execute this rollover. The 6E contracts have higher trading volumes and thus is rolling a bit easier.

 

[virtusa]

You would have to roll over your M6E position every quarter (i.e. 4 times per year). The daily trade volume on the new contract is rather low until a few days before the old contract expires. The same applies to the bid/ask spread: it tends to be a bit wider on the new contract until the last few days before the old contract expires. So you need to have a proper reminder on your calendar to execute this rollover. The 6E contracts have higher trading volumes and thus is rolling a bit easier.

If you want to be hedged continuously you should indeed keep these things in mind.

But currencies have uptrends and downtrends. So if you have a reliable system to define the trend, you only have to hedge in one direction. If your invested amount is in EUR but your trading in USD, you only have to hedge when the USD gets weaker. If the USD would get stronger you don't need to hedge. You make extra profits then. Question is: can you see the trend in a reliable way?

I only hedge in one way.

In hindsight it would look like this: no hedge needed in 2019.

 

[solidme]

You would have to roll over your M6E position every quarter (i.e. 4 times per year). The daily trade volume on the new contract is rather low until a few days before the old contract expires. The same applies to the bid/ask spread: it tends to be a bit wider on the new contract until the last few days before the old contract expires. So you need to have a proper reminder on your calendar to execute this rollover. The 6E contracts have higher trading volumes and thus is rolling a bit easier.

I still dont have a capital that needs a 6E but I think rolling at the right time the M6E will not be much effort.

 

[solidme]

If you want to be hedged continuously you should indeed keep these things in mind.

But currencies have uptrends and downtrends. So if you have a reliable system to define the trend, you only have to hedge in one direction. If your invested amount is in EUR but your trading in USD, you only have to hedge when the USD gets weaker. If the USD would get stronger you don't need to hedge. You make extra profits then. Question is: can you see the trend in a reliable way?

I only hedge in one way.

In hindsight it would look like this: no hedge needed in 2019.

View attachment 245097

indeed now that the EUR is getting stronger I feel more the need of an hedge

 

[solidme]

I Just found that IBKR have two types of FX trade: FXConv that is actually a currency conversion and VIRTUAL FX Position, that is virtual you don’t covert . Is not sclera how it works what are the implication on margin and if you are borrowing anything . Do you know more?

 

[cesfx]

Ib is a kind of a multi currency account. I use fxconv to balance between gbp eur and usd, there is also a function that authomatically makes a conversion for negative balances. Or you can do your own conversion as if they were trades but selecting fxconv.

 

[cesfx]

It can be confusing at first but you can organise a basket of currencies depending on your need. Costs are the same or similar to an FX trade.