Currency hedge?

So if I buy a stock in a foreign currency, then later sell it for a small profit, I may still make a loss overall if FX has moved against me. Here’s a crazy idea. Why not bring in some of that CFD FX goodness as a currency hedge in Invest mode?

Example: My account is in GBP, and I buy some stock in EUR. There’s a toggle to “Enable FX Hedge.” If I choose to do this, it opens a CFD position short on EUR/GBP. That way if the stock price stays still but the currency moves, I won’t see any difference in my GBP account. Could even use the stock itself as margin!

You can sort of do this manually, but with a minimum trade size of 500 on both GBP/USD and EUR/GBP it’s a bit of a blunt instrument - plus you have to keep switching modes, and moving funds around.

What do people think? Is this a stupid idea, or genius? :grin:

Leaving aside what the FCA might think of this, it sounds like a surefire way to reduce your average returns. What about those equally likely times that the euro appreciates and this hedge loses you the currency gain?

Purchasing the hedge will reduce volatility, but is the cost acceptable? The interest rate cost on a CFD is a formidable hurdle if you are thinking of long term investment.

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There is a much easier solution to this: separate currency conversion and stock price risk by providing Multicurrency account GBP/EUR/USD etc.

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Heh, I wasn’t honestly expecting this to get much traction - I just wanted to share my idea.

Multiple currency accounts could be used in a way that would make this unnecessary, but ultimately you want your money back in your home currency so they aren’t as good as a hedge. Not as good as the one I’m imagining, anyway.

Think it may have to stay in my imagination :slightly_frowning_face:

CFD is not a cost-neutral way to hedge. The CFD platform is T212’s money maker with added spreads and FX fees. On top you will pay overnight swap when you hold longer.

How would a multicurrency account reduce risk? It would not solve the problem that fx movements can affect profit in the home currency.

All that multicurrency accounts would enable you to do is to time the moment of your conversion between currencies. It would not have any effect on your taxable gain or losses since those are determined by the exchange rates in force at the moments of purchase and sale, not by the rates at other times that you might later exchange currency.

It you think you think you can predict currency rates enough to profit by timing the moments of currency conversion then you may as well make you millions by trading fx directly.

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exchanging once is certainly less risky than exchanging at every buy and sell when you buy and sell in the same foreign currency frequently

I do not understand the logic of the above statement.

  1. Exchanging £200 once will have a currency gain of X, where X has mean 0 (assuming you cannot forecast exchange rates) and some variance, say V(X).

  2. Exchanging £10 on 20 occasions will also have mean 0, but variance 10 V(X/20) = V(X)/40.

The first and second series of transactions involve the same quantity of money, and both have expected currency gain of 0. But he second has 1/40th the variability (risk) of the first.

If I purchase $1000 today, for example at 0.78, and I put that into my ‘US wallet’, then that $1000 is still the same 1000 tomorrow, regardless of the exchange rate , as I am not concerned with it's price relative to the £ anymore. I can then buy stocks with that money, without fear of moving rates.

I guess the issue is that I could use that wallet to trade and manipulate the exchange rate, but I would be content with T212 putting a minimal conversion fee on it to make it unviable

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Fair enough, but in a taxable account this strategy can lead to record keeping headaches. To comply with the tax code you will need to keep a record of the actual exchange rate that pertained at the time of each trade in order to track gains and loses in your base currency, no matter that you worked within a USD account and were not actually doing any currency exchanges.

I appreciate that there may be some psychological attractiveness, but I doubt that I could actually achieve improved investment returns because of using multicurrency accounts.

How do you prevent loss on double conversion when reinvesting dividends and compounding of this irreversible loss?

In an account with other brokers who charge a 1% or 1.5% conversion fee this is indeed a problem. However, Trading 212 has 0 fee and the buy/sell spread is insignificant. As previously discussed that spread is something tiny like 3 per 100,000. So you lose the cost of a cup of coffee to exchange fees after having reinvested 100,000 of dividend income, should you be so lucky to be receiving that magnitude of income on your multimillion portfolio.

For a long term investor the currency exchange cost will be negligible. However, I can see it could become a small cost for someone trading in and out of an instrument multiple times a day. But then the buy/sell spread on the traded instrument itself will be a source of vastly greater cost.

Problem is that money isn’t “fractional”. It is precise in 2 decimals only…

Thus on 1$ dividend you lose 0.01, which is 1%.

See purchase price 29.83. Made purchase of 1$ worth.

Then I sell for same price:

0.99$ value receivable… thus i incurred 1% loss on FX.

There is something odd here. At the quoted exchange rate your $1 bought £0.7849297. At a price of 29.83 you should therefore have received 0.7849297/0.2983 = 2.631343279 shares. But you received only 2.61825. Why?

Note that 2.61825/2.631343279 = 0.9950241084. This suggests that you have paid 0.5% stamp duty, as is charged on UK shares, also perhaps that the price may not have been exactly 29.83.

Note that (0.995 * 0.7849297)/2.61825 = 0.2982927725 would be the price. My conclusion is that your missing 0.01$ is due to stamp duty, not currency exchange.

In the example below I bought something that does not have transaction tax. I bought 100 VERX on Xetra for £2665.03 at a price of euros 29.235. Moments later I am selling with a limit order the same price of 29.235 and am quoted a ~£2665.09 - actually a tiny gain to my advantage of 0.06 due to small fluctuation in the exchange rate over the seconds it took me to set this up.

The stamp duty rules are that the stamp duty is rounded to the nearest 1p. So if you buy LLOY in value of £0.7849297 the duty would be 0.005 x £0.7849297 = 0.0039246485, which should round down to 0. But we don’t really know how Trading 212 are implementing stamp duty on fractional shares. It looks like in this case you were charged 0.5%. On my app the minimum order value for LLOY is £1 and I am charged 0.01 stamp duty, rounded up from 0.005. However, it is possible to make a pie with LLOY the only member and then purchase £0.99 and be charged no stamp duty.

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Seems you are correct.

I always used GBX stock for FX calculation as usually the transaction highlights Stamp duty, so this is interesting find, seems stamp is paid but not visible on actual transaction.

Tried now Daimler stock on Xetra and I bought at 40.60E for 1$.

Sold at 40.53e for 1$. So even with less price due to 0.996 probably i was rounded up to 1$ …

We have been told that Trading 212 keep an internal balance of client money that runs to more than 2 decimal places, precisely to deal with the issue that currency exchanges will otherwise suffer from rounding. This has explained why from time to time an extra 0.01 gets deducted from a client’s free funds as the sum of numbers like 0.00xxx accumulate into the second decimal place. This has puzzled people in the past and maybe Trading 212 have now found a way to eliminate this wrinkle. It may be that you actually sold at 40.53e for 0.9998$ credit to your account but this has been shown to you as 1.00.

Anyway with all this said and done. Now I would even like to have multi currency debit account even more on T212. If they would give such crazy fair FX I would use it for my day to day spending…

Yes indeed, Trading 212 exchange rates are even better than Revolut. But as you say, one would need a debit card on the account to access them for things other than buying and selling shares.

Well Ivan teased us earlier this year. So lets hope. :crossed_fingers:

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What rounding method are you using there? I would assume T212 would use bankers rounding which can also explain away some oddities(I hate working with bankers rounding as it sometimes goes against what I was taught in primary school).