Hi guys,
How do you hedge against the FX impact on your investment account?
The current situation with the EURUSD affects my portfolio.
Thanks for sharing ideas.
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I use a CFD on gbp/usd. I open a position for every stock I trade. It means I have to track the cfd as fluctuations need to be matched by margin to ensure a margin call isn’t made. This means I need capital in my CFD account with healthy free funds to prevent a margin call and my positions being shut.
You need to be conscious that if the currency doesn’t appreciate then you will have a loss on your CFD position. You will need to fund this loss and the interest and the margin to ensure the position stays open until you close your trade.
You need to also be conscious of interest as you are giving up 3% of gains a year. The S&P on average makes 8% per year. Therefore on average you will only be making 5% provided your stock tracks the S&P.
This isn’t advice or a proposal that you should hedge your position. You really do need to be considerate that cfd’s are dangerous leveraged items that carry a high risk of loss.
I really need to reiterate that CFD part, from looking at the margin thread many people are using CFDs but don’t seem to understand how they work or the risks associated. If you are going to hedge do your research and make sure you understand what a CFD is and how it works.
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Thank you for the reply, it is quite detailed.
I do understand the risk using CFD and I am fully aware of margin requirements while using these.
So you re saying that you opened a trade for each investment you have. I have several trades against my EUR account. USD and CHF.
Also how would you size your FX position? How about just having one position open on USD and one in CHF.
I might have to research about this hedging purpose.
Thanks
I’m pretty new to this so far, but my way of dealing with the FX is that I intend to invest now for a very long time.
I’ll put putting in regular amounts each month so in theory this will bring some balance to it.
Fair play to those who are experienced enough to hedge though! I dare say I’d end up doubling my risk right now though.
You mention the cost of running this hedge strategy is a loss of 3% of your 8% pa average gains. Have you compared how you would have done if, over a large number of years, you had not done this hedging and taken the good and bad fx as they come?
I would say I feel my avg purchase is around 1.26-1.30 so with the rate at 1.35 it’s about 4 years worth of interest charges I am covering at the moment, this assumes though I bail out of stocks and leave the game.
I don’t hedge to maximise my profit otherwise it wouldn’t be a hedge I would just trade fx on the direction I believe it will go. I hedge to decrease my volatility and give certainty in my trade. That way I can focus on getting the right stock and run the trend without worrying about my gains being eroded by fx.
As we all like to gamble I leave 20% unhedged to provide some flexibility.
I reiterate this here, as I do at work, a hedge is not designed to make you money and just because you lose money on a hedge doesn’t mean it wasn’t successful. It’s primary aim is to provide certainty to a future cash flow and reduce volatility that could be caused by an external factor, a.k.a insurance.
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As an alternative viewpoint, I see an investment in the US stock market as an investment in the $.
Holding $'s is an additional asset class worth owning as part of a portfolio (as are other currencies).
Typically if a currency weakens most globally diversified companies will go up in value as their foreign earnings increase. The weakening $ is an additional contributing factor to the S&P 500 performance.
If your portfolio is 100% US stocks then maybe you are over indexed on $ and could look to invest in other markets.
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As an alternative viewpoint, I see an investment in the US stock market as an investment in the $.
This is a reassuring way to look into a long-term investment 