How to hedge currency risk with Interactive Brokers?
mrmojoseph
Newbie
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I feel as if the response to the original question is not optimal especially now in an environment where interest rates are around 5% and for long term positions not suitable.
Simply borrowing money when buying stocks that leads to a negative USD in IB is currently not sustainable with high interest rates.
Furthermore, if you have 1000 000 SEK in your account and you buy US stocks for the same amount, converting the negative USD balance to avoid the high interest rate, you still need to hedge the USD currency.
USDSEK has dropped 10% in the last 7 days.
Thats a lot of money lost.
If I were to buy futures contract I would still need to borrow on margin to cover that position. Possibly also lead to higher margin requirements which is not ideal but it depends on how smart IB is.
If I take a SEKUSD position it might be similar but potentially slightly better if both currencies have the same interest rate but still not great.
The only cheap way to do it is to do it using options which still has a price, and which I am not properly versed in yet, or
take a position on US stocks half the size of your account balance, in this example it was 1000 000 SEK so if I instead take a position worth 500K on stocks and use the remainder to buy SEKUSD future it could work.
But the pity is now that I have to utilise a maximum of half my funds to accomplish the hedge.
In this environment the old ways of having a negative USD balance simply wont work today.
Anyone has any further input to share on the topic?
Simply borrowing money when buying stocks that leads to a negative USD in IB is currently not sustainable with high interest rates.
Furthermore, if you have 1000 000 SEK in your account and you buy US stocks for the same amount, converting the negative USD balance to avoid the high interest rate, you still need to hedge the USD currency.
USDSEK has dropped 10% in the last 7 days.
Thats a lot of money lost.
If I were to buy futures contract I would still need to borrow on margin to cover that position. Possibly also lead to higher margin requirements which is not ideal but it depends on how smart IB is.
If I take a SEKUSD position it might be similar but potentially slightly better if both currencies have the same interest rate but still not great.
The only cheap way to do it is to do it using options which still has a price, and which I am not properly versed in yet, or
take a position on US stocks half the size of your account balance, in this example it was 1000 000 SEK so if I instead take a position worth 500K on stocks and use the remainder to buy SEKUSD future it could work.
But the pity is now that I have to utilise a maximum of half my funds to accomplish the hedge.
In this environment the old ways of having a negative USD balance simply wont work today.
Anyone has any further input to share on the topic?
TWI
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Best way is to convert from account base currency to USD spot for an amount slightly more than the value of the equities purchased, then you will not be charged for any USD borrowing. If you close the trade in profit or loss, then just convert the dollars positive balance back to base currency. Yes, you have FX risk in the position because the equity is quoted in USD not base currency and if you want to hedge that out then you could take a futures position selling USD, buying base currency but this is in fixed multiples equivalent to futures contracts and a USD equity is not the same as a USD cash position. Personally I do not hedge this, only the closed value of the trade. If you are bearish USD and bullish base currency then better to approach that as a independent forex trade IMO.
Hello, I have a similar situation and futures seem to me the best option. However, I do not think Interactive Brokers has any contract for the EUR CAD pair so I will have to purchase two pairs of futures: CAD/USD and USD/EUR. As long as I fix the amount in USD in both futures, I do not see any issue. Am I missing something?
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