Another question I have is how much ETF or futures will impact your buying power
What is a good way to hedge currency risk?
- Thread starter solidme
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Another question I have is how much ETF or futures will impact your buying power
If you hedge by using euro/usd 6E, it will take you about $2,860 for a 125,000 euro contract.
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6E or M6E will give you a capital efficient hedge, with the smaller contract being for €12,500 so you can fine tune your risk. But, the hedge duration / futures roll yield might be a significant consideration (not familiar).
That's very interesting ifo, I guess the M6E contract also mentioned by @Real Money will take 1/10 of the capital compared to 6E and give me lot of flexibility.
It depends if you are an American or not. IBKR can't give leverage to US clients in spot FX, but they can for overseas clients. You would have to compare the FX swap rate against the futures roll yield while factoring in the leverage ratio for buying power considerations (also hedge duration).
In other words, it is quite nuanced if you are not an American client. You may get more buying power using spot FX transactions, but the costs may be higher. This is complicated stuff involving the cross-currency basis swap rate.
I'm not quant enough to do the analysis, but I'm sure somebody can. @taowave
Just checked: the margin required for a contract of M6E is 558.82$
This makes the future margin wise more convenient than an ETF that has a margin req of 25% of the value . @Lpw54
I'am from EU and Indeed I've to check what's the real cost and margin of maintaining an FX position fo the same size
This makes the future margin wise more convenient than an ETF that has a margin req of 25% of the value . @Lpw54
I'am from EU and Indeed I've to check what's the real cost and margin of maintaining an FX position fo the same size
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Years ago I looked into this a bit.
Futures time decay compared to spot swap fees is essentially the same.
If it wasn't the same, arb traders would go long spot & short futures to capture the +swap fees.
Futures have the interest rates (swap fees) priced in.
Years ago interest rates were higher for AUS $ and NZD $ so I wanted to capture the interest payments. Long spot vs. short futures would give no directional risk. With the 50:1 leverage available in spot (U.S.) and leverage available with futures, the interest payments would be quite nice relative to $$ invested.
Spot will get you more leverage for less margin even @ 50:1.
If $12,500 has $558.82 margin for futures, that $558.82 x 50 = $27,941 spot.
Also, no expiration with spot so no commission/spread fees to roll out.
***Check your broker for swap fees. All brokers not the same.
Ninjatrader margin is $286 for M6E. AMP and GFF the same.
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.
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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.