Do you hedge?

[davidc123]

Hi,

I'm just getting into spot forex trading, and I'm just wondering how people manage a trades exposure to fx rates between account ccy and the trade's ccy?

i.e my account is gbp but I want to trade USD.CAD. To open the pos, my GBP gets traded into USD, which gets traded into CAD. USD.CAD goes in my favour, so I close the position, but now I have to convert the USD back into GBP.

So when entering a trade, is it normal practice to hedge the exposure to the GBP.USD rate?

Thanks.

 

[Rhody Trader]

Let me correct something. When you do your USD/CAD trade you don't convert GBP into USD. You just execute the trade wherein you effectively borrow CAD (assuming you're going long), convert to USD, and invest the USD proceeds. The profits or losses will be converted into your account currency, nothing else. As such, you probably can't really hedge yourself because it's a moving target. You won't know until the position is closed how much of an exposure you've got.

 

[davidc123]

Thanks Rhody Trader. Who do you trade with? I'm trading through IB and they definitely work by doing an fx trade to get some cash in the base ccy of trade, then performing the trade. Same goes for stocks - I trade any USD stocks, then my GBP cash gets traded into USD first before buying the stock. So when I close the trade I'm always left with cash in the base ccy of the trade, which I convert back to gbp.

If there are others who have a better system I'd be very happy to switch.

 

[Rhody Trader]

IB definitely does things differently than your garden variety retail broker. I traded with them for a while, but found the forex handling extremely annoying. I can understand the stock trade conversion as you are actually buying and selling a dollar denominated asset, and thus need the dollars.

 

[TraderNumber7]

To the OP:

The title of your thread asks: "Do you hedge?" But, the body of your post deals with dollar denominated trade execution and basic currency conversion settlement, which has little to do with Hedging the Trade as a strategy. If you are merely talking about currency conversion at settlement, then your question as been answered. But, if you are talking about Risk Mitigation by using hedging as a trade strategy, then there is a lot left to be said.

Which, is up to you.

 

[managedfx]

I hedge sometimes if the I am getting nervous and see trend reversing. Then I try to eventually use a dollar cost average strategy hoping the market retraces.

 

[davidc123]

To the OP:

The title of your thread asks: "Do you hedge?" But, the body of your post deals with dollar denominated trade execution and basic currency conversion settlement, which has little to do with Hedging the Trade as a strategy. If you are merely talking about currency conversion at settlement, then your question as been answered. But, if you are talking about Risk Mitigation by using hedging as a trade strategy, then there is a lot left to be said.

Which, is up to you.

In the example I gave, I'm speculating on USD.CAD but also exposed to changes in GBP.USD. I was asking do you hedge the GBP.USD exposure by taking a GBP.USD position to lock in the exchange rate at the time of opening the trade, so that when I close the position any changes to GBP.USD wont affect my profits in USD.CAD.

So I'm not hedging the trade itself, just the extra exposure due the ccy of my account.

 

[GammaJammer]

The short answer is most retail traders don't, mostly because the sums involved are just too small to make it worth the hassle.

But once you're talking in interbank amounts then yes, the banks traders etc will hedge some of the larger exposures. But there's so much to learn right now that I really wouldn't get too hung up on it until you're trading chunky size if I were you. Trust me on this one.

GJ

 

[davidc123]

I don't get how it wouldn't be worth the hassle - for me the amounts are small but my exposure to GBP.USD would be the same as that of USD.CAD, so any profits in USD.CAD could easily be wiped out by a negative turn in GBP.USD.

Anyway the solution for me is to switch broker, which I'm doing now. Thanks for the advice guys.

 

[GammaJammer]

Wouldn't be worth the hassle if the amounts were so small that either ;

i) The FX bid / offer spread cost ate into your profits more than the likely fluctuations would (bearing in mind that hedging an 'open' P+L isn't a one time trade if you're really that bothered about these details - you gotta continually adjust it as your P+L swings up and down), or;
ii) The time taken to sort it all out had a higher opportunity cost than just letting it go.

And remember - in terms of hedging your P+L, this ISN'T the same sized exposure as you have on the trade itself.

Say for example you buy $100k vs Cad, and the market shoots up 5%. Happy days - you made a 5% profit. But that means your profit is approx USD 5k. Which is far smaller than the $100k position size. So you would end up doing a gbpusd trade for approx gbp 3,210 ($5k / 1.5575 at current spot level). And then if the usd/cad market retraced, you would need to sell some of that sterling back (as your P+L that you're hedging would be lower) so you would end up jobbing around in tiny trades all day, for little or no real impact on your bottom line (literally pennies potentially).

And my example was, in any case, not even that small a trade. Bet your first trade is less than $100k notional. So It's even smaller than that in terms of hedging P+L swings. Give it up mate. Spend your time learning stuff and you'll make more than you would save farting about with hedging the P+L on a newbie's micro position. Best advice I can give you. Honestly.

GJ

 

[davidc123]

GJ, I'm new to forex, I've been trading for quite a while so I'm more concerned about getting details like this ironed out before I take forex more seriously.

I'm not talking about hedging the rate on the p/l - i don't care about that. I'm talking about the inital GBP I pay to open the trade. Assuming I'm not trading on margin (which I'm not, believe it or not) then in your example I would be left with $105k which I need to convert to GBP - not just the $5k profit.

I'm not making this stuff up, it's happening to my account. So I was just wondering if people hedge the initial transaction.

 

[Rhody Trader]

davidc123 - What GJ is talking about is what I mentioned in my initial response - the only currency exposure being the final profit/loss, not the position itself. Are you 100% sure you're seeing variance on the full size of your position?

 

[GammaJammer]

Sorry - misunderstood. So can I get this straight now by using a real worked example.


You buy $200,000 vs cad at 1.0410. To do this IB automatically buys the USD at, say, 1.5640 out of your GBP

Question is, if USD/CAD goes up to, say 1.0580, PRECISELY how much USD are you left with. i.e. when you close the trade does your IB account become flat in cad and reflect P+L plus or minus in USD, or would you close exactly $200k, this realising your p+l in cad, not usd.

Bear with me - it's relevant

 

[lbranjord]

The short answer is most retail traders don't, mostly because the sums involved are just too small to make it worth the hassle.

But once you're talking in interbank amounts then yes, the banks traders etc will hedge some of the larger exposures. But there's so much to learn right now that I really wouldn't get too hung up on it until you're trading chunky size if I were you. Trust me on this one.

GJ

Oanda claims that they hedge, their tech support guy mentioned it when I asked how THEY trade.