I've put on a trade involving securities denominated in both Canadian and U.S. dollars. In addition to the risk profiles of the underlying securities, the trade is also susceptible to exchange rate fluctuations: in this case, even if the underlyings move in my favor, any trading profits would disappear if the USD:CAD exchange rate dropped from today's ~76% to ~74% (though my profit would RISE by the same degree if the rate rose to ~78%)
My original plan had simply been to ignore the currency risk altogether, reasoning that it's a fool's errand to try and predict the direction of FX movement, so because the benefits I'd reap if the rate moved in 1 direction are equal to the losses I'd sustain if it moved against me, then I'll just roll the dice. IOW, if it's a +EV trade, then as long as I'm willing to bear the FX risk, I should be willing to put it on, hedge or no hedge.
HOWEVER,I'd now like to understand just what it would cost to hedge / insure against the FX rate moving against me. To give an example in grossly simplistic terms, if I calculate that my trade has a current expected value of a +$1,000 gain -- which would decrease to ZERO if the CAD/USD rate dropped from 76% to 74%, but INCREASE to $2,000 if the rate rose to 78% -- I want to learn what instruments would help me 'lock in' today's exchange rate for the duration of the trade, trading away some +EV for certainty. I.e. what currency instruments would let me essentially say "I've got a net present value gain of $1,000 that's susceptible the FX fluctuations, but I'd take $800 to remove that risk altogether"? Hope this Q made sense
My original plan had simply been to ignore the currency risk altogether, reasoning that it's a fool's errand to try and predict the direction of FX movement, so because the benefits I'd reap if the rate moved in 1 direction are equal to the losses I'd sustain if it moved against me, then I'll just roll the dice. IOW, if it's a +EV trade, then as long as I'm willing to bear the FX risk, I should be willing to put it on, hedge or no hedge.
HOWEVER,I'd now like to understand just what it would cost to hedge / insure against the FX rate moving against me. To give an example in grossly simplistic terms, if I calculate that my trade has a current expected value of a +$1,000 gain -- which would decrease to ZERO if the CAD/USD rate dropped from 76% to 74%, but INCREASE to $2,000 if the rate rose to 78% -- I want to learn what instruments would help me 'lock in' today's exchange rate for the duration of the trade, trading away some +EV for certainty. I.e. what currency instruments would let me essentially say "I've got a net present value gain of $1,000 that's susceptible the FX fluctuations, but I'd take $800 to remove that risk altogether"? Hope this Q made sense
