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Question about Hedging Forex - Help Needed
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Question about Hedging Forex - Help Needed

  #11 (permalink)
Market Wizard
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jonc View Post
Theoretically speaking if a trade is 100% hedged would also mean there will be no profit or loss; otherwise it is not 100%. So we generally do not wish to have a perfect hedge.

But I can think of one reason why you want to have a 100% hedge in spot forex.

I'm curious, what is the reason?

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  #12 (permalink)
NDioWealthAmp
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Since you are a NinjaTrader user, you can simulate hedged positions on whatever instruments via the use of ATM strategies (which will require at least a stoploss or profit target set) and trading in opposite directions.
You will then be able to track both sides independantly and that is the only benefit of such behavior.

The good news is that the hedging will be virtual while you will be actually flat at the broker. Consequently, you will avoid to pay twice the commissions when flattening both legs of your ghost hedge.
Also, you will be free from swap fees overnight as well, instead of being double charged for holding a true hedge.

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  #13 (permalink)
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Yes JONC, technically the swap and spread would not make it a perfect 100% hedge but I'm okay with that small variance in price. In this strategy, an as close to perfect hedge is what is needed. GEOTT, A subaccount could possibly work, but controlling two accounts at the same time could be problematic.

Can anyone advise as to the efficiency of the hedging with 1. Futures 2. Futures Option 3. Synthetic Pairs? Which would give the tightest hedge possible?

EVIDENCE ALPHA I'm not sure I follow your Ninjatrader example. I'm not sure how a virtual position (ghost hedge as you named) will actually keep me hedged? Are you referring to some type of continuous Stop and Reverse strategy? My apologies for not understanding...

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  #14 (permalink)
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Please open NinjaTrader's help guide and search for the mode "Display selected ATM strategy only". Play with it and you will eventually figure it out.
Basically, NT will let you act as if you manage long and short positions at the same time, although in reality you will be flat (with even numbers on both sides).

You are better to learn it this way for cost savings and it will prevent you from using another instrument class or complex and approximate tricks.


Last edited by NapoleonDynamite; December 31st, 2015 at 03:01 PM.
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  #15 (permalink)
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I no longer have NT, but will take a peak at the help guide to understand what you're explaining. Not sure if that will work for my purposes but I will look at it. Thanks.

Any thoughts on using synthetic pairs? Using 3 pairs to create a synthetic position in the opposite direction?

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  #16 (permalink)
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Evidence Alpha, would you happen to know the name of the ATM strategy you're referring to? Thanks.

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  #17 (permalink)
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excite2 View Post
Any thoughts on using synthetic pairs? Using 3 pairs to create a synthetic position in the opposite direction?

You can use synthetics to set up a completely neutral hedge should you so choose. You can refer to the math here - Triangular Arbitrage Definition | Investopedia - it is exactly the same math you would use to set up a hedge.

Now, as has been suggested before, there is no real benefit in creating a hedge vs just exiting the position. Reasons for that are:
  1. Granularity - It is very difficult to construct a perfect hedge trading lots with a size of 100,000, 10,000 or even 1,000. You would need to use OANDA with their lot sizes of 1, the only exception being if your account size is so large that you can side-step the granularity issues.
  2. Spread - You will effectively be hit with 3 times the spread, and depending on the spread on the pairs that create your synthetic it can be even more.
  3. Interest rate differentials - No matter how you construct it, you will be paying interest to the market maker. Reason for this is simply that the MM never gives you the mid rate, rather mid-rate +/- his spread.
  4. Capital tied up - You essentially tie up capital that could be used elsewhere. Granted with 50:1 leverage in fx, it should never be an issue, but you could have been earning interest on that capital (yes, i know it is almost nothing).

I would encourage you to register with OANDA for one of their practice accounts. I believe you need to use FxTrade for the smaller lot sizing as MT4 does not allow such small size. You can then check your math / position by clicking on their "Exposure" tab. A properly constructed "hedge" will have exposures of close to 0 on all of the currencies.

Regarding your hedges in general, I can make the following comments on the other 2 suggestions you had:
  1. Futures - Could provide an effective hedge if in the same account. If not in the same account, then one leg could be busted on a move like the EUR/CHF made. With the current low interest rates, you could essentially lock in your account balance, i.e. no matter how the currencies move, your account balance won't change.
  2. Options - Not a perfect hedge (considering the deltas and gammas mostly, but other items also affect this). Biggest plus is that you can cap your downside, but leave your upside intact (for a price of course). Can't comment on binary options as I never really investigated them.

Regarding the price-neutral hedges (same fx instrument if outside US / futures / synthetics), they are mostly constructed by traders who do not wish to take a loss. Grid-trades used to use different sub-accounts that mostly churned until they blew up or gave up. Others tried to exploit difference in currency rates, but I do not know of a single trader who was successful at this.

If I were in your shoes, I would spend a lot looking for holes in your method. Triangular hedges were all the rage when I was still at OANDA - a lot of newbies thought it was the holy grail, while the more profitable traders made pure directional trades without applying any hedges.

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  #18 (permalink)
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grausch View Post
the more profitable traders made pure directional trades without applying any hedges.

This tells a valuable and significant story.


Last edited by Tymbeline; December 31st, 2015 at 07:35 AM.
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  #19 (permalink)
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jonc View Post
Theoretically speaking if a trade is 100% hedged would also mean there will be no profit or loss; otherwise it is not 100%. So we generally do not wish to have a perfect hedge.

But I can think of one reason why you want to have a 100% hedge in spot forex.

Not sure what your reason is, but I thought of one...

Open 2 accounts with 2 different brokers, both of which have a "no debit balance" policy. Then, if there is some sort of market crash (like the Swiss Franc debacle), your losing account balance would never drop below zero, while your winning account could have a huge profit.

Note though if you did this, it is probably a one shot deal (the losing broker probably won't want you business anymore). And, you make money only when the hedge is lifted (when losing account goes to zero), so your profits only occur when you are not hedged, trading directionally. Even then, considering the carry cost, and the margin tie up, your return on investment would probably be pretty low.

If you have any questions please send me a Private Message or use the futures.io "Ask Me Anything" thread
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  #20 (permalink)
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One options contract + one futures contract would have you 100% hedged. e.g. long 1x 6E contract and long 1x 6E put at the money.

Or you could be long 1 futures contract and short the corresponding FX balance of the value of the futures contract, e.g. $100,000 for the AUDUSD/6A (with the interest cost to float the FX position eat into the hedge)

That would be 100% price hedged, but then as Keven Dog has constantly been inquiring, what is the objective of the hedge? Are you trying to remain delta neutral, keeping your books easier to balance, etc.

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