Currency hedging

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What´s the cheapest way to hedge currency risk? As 80% of my assets are invested in US$ denominated stocks I´d like to hedge at least of the risk resulting from my exposure to currency fluctuations. I guess the cheapest way to do that is forward selling of US$ for Euros. In theory the cost should merely be the diffence in interest rates (plus fees), which is currently very low. Any other ideas? And how to enter into such a forward sale? Which brokerage is offering that? Mine doesn´t (Lynx).

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Open a Fremdwährungskonto in USD. A few banks should offer that, Google around. Pay attention to the fees!

The nice thing is that the account should benefit from the deposit protection scheme of 100k EUR equivalent.

 

EDIT: Never mind my reply above, it seems I have misunderstood your question. If your assets are USD denominated ETFs, there usually should be EUR-hedged version of them. Be careful though that the TER would be higher and their liquidity lower.

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I don´t like ETF´s and therefore I don´t have any. I´d like to do a forward sale of USD versus Euros. Any idea how to do that?

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On 6/17/2020, 4:39:57, jeba said:

What´s the cheapest way to hedge currency risk? As 80% of my assets are invested in US$ denominated stocks I´d like to hedge at least of the risk resulting from my exposure to currency fluctuations. I guess the cheapest way to do that is forward selling of US$ for Euros

 

The currency a stock is denominated in (the functional currency of the portfolio) has little relevance to your own functional currency (presumably EUR).  You could, for example, trade a US stock on a German exchange and the comings and goings would all be in EUR or vice versa. Same company. Same profitability.  A mile is a mile is a mile - or 1.6 Km. The only difference is whether its value is expressed in metric or imperial units.

 

Assuming the validity of the "efficient market theory", the price you paid for the stocks in your portfolio probably already take into account that company's foreign currency risk whether that risk is in the cost of goods/services it purchases or the revenues from markets it sells into.

 

So, actually, the cheapest way to hedge your currency risk is to start with an analysis of your US$ denominated portfolio to see whether the companies in which you are invested have exposure to currency risk and to what extent they are already hedging that risk at your, the shareholder's expense. If the company's functional currency is the USD, then its foreign currency gains or losses will be reflected on its balance sheet and income statement in USD terms.  Its market price - expressed in any currency - will/should reflect that impact on its future profitability.

 

If, however, you are interested in speculating rather than hedging, you may find what you are looking for at either of these organisations.  No doubt there are others but I have used both for their convenient and free historical exchange rate information. But you may find their forex trading platforms and products of greater interest:

 

www.oanda.com

 

www.xe.com

 

 


 

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53 minutes ago, Straightpoop said:

 

The currency a stock is denominated in (the functional currency of the portfolio) has little relevance to your own functional currency (presumably EUR).  You could, for example, trade a US stock on a German exchange and the comings and goings would all be in EUR or vice versa. Same company. Same profitability.  A mile is a mile is a mile - or 1.6 Km. The only difference is whether its value is expressed in metric or imperial units.

 

Assuming the validity of the "efficient market theory", the price you paid for the stocks in your portfolio probably already take into account that company's foreign currency risk whether that risk is in the cost of goods/services it purchases or the revenues from markets it sells into.

 

So, actually, the cheapest way to hedge your currency risk is to start with an analysis of your US$ denominated portfolio to see whether the companies in which you are invested have exposure to currency risk and to what extent they are already hedging that risk at your, the shareholder's expense. If the company's functional currency is the USD, then its foreign currency gains or losses will be reflected on its balance sheet and income statement in USD terms.  Its market price - expressed in any currency - will/should reflect that impact on its future profitability.

 

If, however, you are interested in speculating rather than hedging, you may find what you are looking for at either of these organisations.  No doubt there are others but I have used both for their convenient and free historical exchange rate information. But you may find their forex trading platforms and products of greater interest:

 

www.oanda.com

 

www.xe.com

A significant part of the companies in my portfolio are doing business in the US only and have only US$ income (e. g.REITs. pipeline operators, infrastructure companies). Others are US companies but at least they have worldwide activities and therefore I´d say they have some natural hedge against US$ weakness. But that´s not enough for my liking. Ideally I´d like to have say € 1000/month of income hedged and a long-term hedge for say 50% of the value of my portfolio hedged against the Euro for say 5 years. The cheapest way to achieve that would probably be to enter forward sales of e. g. 1100 US$ for € for each of the next 60 months (not very convenient) and a lump sum equivalent to 50% of my portolio´s value in 5 years. In theory this should merely cost the difference in the level of interest rates (plus transaction costs). I don´t see how you can do forward sales on the website you mentioned. Am I missing something?

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The volumes you are interested in hedging are likely far too small to interest a bank - at least not at any reasonable cost.

 

The only standardized future contracts known to me are those offered by www.CMEgroup.com but their standard contract is for EUR 125,000.  You can, of course, trade options on those contracts but that is more in the realm of speculation than hedging.

 

If despite the low volumes involved you nevertheless regard currency risk to be worth the cost and effort of hedging, I suggest the most practical way of doing so is to restructure your equity or debt holdings to reduce what you regard as an overexposure to the USD or the US economy.

 

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3 hours ago, Straightpoop said:

The only standardized future contracts known to me are those offered by www.CMEgroup.com but their standard contract is for EUR 125,000. 

That would be ok. I guess you mean those: https://www.cmegroup.com/trading/fx/g10/euro-fx.html

I had seen that website before but couldn´t find the symbol e. g. for the contract expiring in June 2025. When I asked Lynxbroker they refused to tell me because they said this would amount to providing asset allocation advice which they´re not allowed to give. Do you know where to find the symbols for the contracts on that website?

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I'm afraid I can't help with that.  You'll have to explore this with your broker.

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