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

  #1 (permalink)
Trading Apprentice
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Question about Hedging Forex - Help Needed

I am a trader from the U.S. and since no forex hedging is allowed in the U.S. I would like to know if there is a way to create a hedge for any spot forex currency pairs that is hedged 100%? I only know of 3 possible ways, but I have not tried them so I was wondering how effective they are?

1. I could hedge with futures, 2. with options on futures, or 3. with 2 other currency pairs to create a synthetic pair. But what I need to know is if these approaches hedge my position on a 1 to 1 ratio, where the hedge is perfect? I'm not sure if the futures move 100% in tandem with the spot pair, and with options I have to worry about the delta changing as price moves, and with the synthetic pairs, I'm not sure how strongly it hedges. Any help would be GREATLY appreciated! Thanks.

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  #2 (permalink)
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  #3 (permalink)
Market Wizard
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Why not just exit the position and be net flat, then you'll be 100% hedged...

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  #4 (permalink)
Trading Apprentice
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:-) Funny... Do you have any serious suggestions I could use?

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  #5 (permalink)
Market Wizard
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kevinkdog View Post
Why not just exit the position and be net flat, then you'll be 100% hedged...

.....Which is the practical way to handle a loss.

Yet, what FX guys call a "hedge" is to stop the loss in some artificial way where they locked in a long/short position thinking they can untangle their way out of it. It's like buying/shorting a further out month in an opposite way to your current position. It does nothing in my opinion. I do not recommend these tactics.

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  #6 (permalink)
Market Wizard
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excite2 View Post
:-) Funny... Do you have any serious suggestions I could use?

I am dead serious. There is a reason the US bans the the practice - it is favored by the naive trader, and the unscrupulous forex brokers out there.

Why don't you explain WHY you need to do this, via a detailed example. I'll bet I can show you how my suggestion is cheaper than any other.

Seriously.

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  #7 (permalink)
Trading Apprentice
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Everything you both say is correct... But I am well aware of the perils of hedging. I am not a naive trader looking for a way to avoid a loss. My normal strategy hinges entirely on strict money mgmt. with extremely tight stops and I never hedge because all hedging does is lock in a loss that must eventually be made up. So I always immediately cut my losses... But the hedging info I am requesting is for a completely different strategy and reason which I would rather not divulge. Any info you could provide is appreciated.

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  #8 (permalink)
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excite2 View Post
I only know of 3 possible ways, but I have not tried them so I was wondering how effective they are?

1. I could hedge with futures, 2. with options on futures, or 3. with 2 other currency pairs to create a synthetic pair.


4. opening a sub-account.

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  #9 (permalink)
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excite2 View Post
1. I could hedge with futures, 2. with options on futures, or 3. with 2 other currency pairs to create a synthetic pair. But what I need to know is if these approaches hedge my position on a 1 to 1 ratio, where the hedge is perfect?

None of these would give you 100% perfect hedge for forex.

1 - due to the spread
2- if you intend to hold the position overnight for spot forex, you have to deal with the swap rates which is different for buy/sell position.

Even if you could take both a sell and buy position at the same time it would not give you a perfect hedge again due to the 2 reasons above

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  #10 (permalink)
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excite2 View Post
But the hedging info I am requesting is for a completely different strategy and reason which I would rather not divulge.

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.

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