Hedging foreign currency exposure using spread betting

[Odysseus]

Has anyone any experience of hedging the currency by spreadbetting. It seems to me that you change £xxx into $xxx to deposit in USD books and then "sell" USD/GBP with a spread firm and just roll it over until the time you convert your USD back into GBP. This way you don't have any exposure to currency fluctuations. The two cancel out.
You would have to calculate how much to sell per pip based on how much GBP you changed into USD but this is straighforward enough.

[munk]

Has anyone any experience of hedging the currency by spreadbetting. It seems to me that you change £xxx into $xxx to deposit in USD books and then "sell" USD/GBP with a spread firm and just roll it over until the time you convert your USD back into GBP. This way you don't have any exposure to currency fluctuations. The two cancel out.
You would have to calculate how much to sell per pip based on how much GBP you changed into USD but this is straighforward enough.

Yes I do that, for a float of around $3k I am buying 11p per pip movement on the GBPUSD future market at PartyMarkets (although I need to adjust this because my float has increased since I took out the 3 month long contract 2 months ago). If you do it make sure you go for the quarterly or 'future' market, the rolling market incurs daily charges to roll it obviously(? ) which increase the cost whereas the future/quarterly market has the rolling fee included in the (larger) spread. Also fairly importantly if you have a float of less than $10,000, PartyMarkets is the only spread site I've found so far that allows you to buy as little as 10p/pip (which I *think* - see below - equates to $1000 exposure).

I think in theory if you buy £1 per pip (assuming 1 pip = 0.0001 movement on the GBP/USD market which is the 'default' on most spread sites) you're hedging $10,000, but *don't* quote me on that! In reality it's not quite as simple as that because I think the spread affects the hedging accuracy to some extent and also the market you trade on isn't necessarily exactly the same as that with which you calculate your 'real' USD/GBP exposure. What I'm doing is just playing around with the amount I'm buying on the GBPUSD market, seeing what P&L I get on that buy order and then comparing that to the amount of P&L on my USD float in 'real' terms.

So for example if I look at my records now I can see that my USD float has depreciated by £110 since October 1st, however on the PartyMarkets side I've made a profit of £92 on that 11p buy order on the GBP/USD Dec 09 spread which isn't perfect but it's not too far off. When that contract ends in December I will 'crystallize' the P&L on my float and on the contract, and then renew the contract - probably increasing it by 2p to 13p/pip I think and see how that goes, it should be there or there abouts.

Of course then again... well £110 is maybe not a huge amount and some people will say what's the point in bothering? To be perfectly honest I just wanted to see how feasible it actually was to do, these kind of things might come in handy at some point in the future. I think you can do similar with mortgages can't you for movements in interest rates if you're on a fixed mortgage? I imagine you could anyway.

PS I've moved this to it's own thread because it's likely to get very lost in that long US books thread.

EDIT: for a much better explanation of how to hedge USD exposure if the base currency is in GBP, see this post by Landprofits (post #12 in this thread), is worth quoting here so it's more prominent:

I haven't done any SB offers yet, and have never really done any Spreadbetting, but let me see if you guys agree with the figures I have worked through - I think I know how to work out how much per pip you need to stake to hedge your currency exposure.

From what I can see (on IG index) Forex rates are quoted as five figures, as each pip is 1/100th of a cent.

At this point I think it is important to clarify "which way round" you are betting.

Using the market GBP/USD as an example, you buy if you expect the first named (GBP) to strengthen against the second named (USD) and vice versa.

For hedging purposes you would buy GBP/USD to protect yourself against GBP strengthening against the USD (i.e the dollar depreciates).

Lets say currently, £1 GBP is worth $1.65 USD.

The SB company quote;

Sell - 16300
Buy - 16700

You want to deposit a float of $5000 into your Moneybookers USD account. I don't know exactly how the exchange rate works with this or whether there are any charges, but lets keep it simple for the moment and assume that you pay in £3030.30 GBP, which at a rate of £1.00/$1.65 is worth $5000 - so you now have $5000 USD in your account.

You want to protect this against currency movement, and thus we are going to buy GBP/USD, becuase we want to protect ourselves against the pound strengthening against the dollar.

So we are going to buy GBP/USD at 16700.

We need to work out how much to stake per point. To do this, take the original amount you deposited - £3030.30, and divide this by the price you are going to buy at, which is 16700.

£3030.30/16700 = £0.18 per pip.

So we buy GBP/USD @16700 for £0.18 per pip. This will protect our USD float against currency fluctutaions, as you will see in the following example.

*******************************



Ok, lets say the value of the US Dollar falls against the UK Pound (or the pound strenghtens against the dollar if you want to say it that way round).

£1 GBP will now actually buy you $2 USD (for the sake of example).

This means that your float of $5000 USD is now only worth £2500 - ouch!

Since you deposited £3030.30, and you can only get back £2500, that is a loss of £530.30.

However, the Spread Betting company now quote the following;

SELL @ 19700
BUY @ 20200

We can therefore close out position at 19700.

If you remember, we opened at 16700 @ £0.18 per point.

19700 - 16700 = 3000 pips of movement.

Your gain is therefore 3000 x £0.18 = £540

That £540 gain cancels out the £530.30 loss (give or take a few quid) we have incurred on our float.

I think that's how it works - feel free to input into this as I think this will be a useful method for protecting aginst currency exposure.

[Odysseus]

Yes I do that, for a float of around $3k I am buying 11p per pip movement on the GBPUSD future market at PartyMarkets (although I need to adjust this because my float has increased since I took out the 3 month long contract 2 months ago). If you do it make sure you go for the quarterly or 'future' market, the rolling market incurs daily charges to roll it obviously(? ) which increase the cost whereas the future/quarterly market has the rolling fee included in the (larger) spread. Also fairly importantly if you have a float of less than $10,000, PartyMarkets is the only spread site I've found so far that allows you to buy as little as 10p/pip (which I *think* - see below - equates to $1000 exposure).

Excellent, thanks.

I'm unsure about the rolling charges I'll have to check through all the financial spreads firms I have accounts with. I'm sure some rolling futures markets don't have carry-over charges but I'm not sure so don't hold me to that. There seem to be so many variations. Not joined Partymarkets, I remember checking them out ages ago but didn't join. Maybe their new account bonus wasn't worth it.
Do you get any interest adjustments? Hmmm not sure if the base interest rates between UK and USA are different anyway?
I know that the basis of the "carry trade" is to sell the currency with the lowest interest rate and buy the corresponding currency with a higher one.
The spread company then pay you the difference between the two rates, but at the total value of the trade not the stake per pip. There is therefore a significant "leverage" to this trade. But I digress....perhaps a topic for another thread...?

[munk]

Excellent, thanks.

I'm unsure about the rolling charges I'll have to check through all the financial spreads firms I have accounts with. I'm sure some rolling futures markets don't have carry-over charges but I'm not sure so don't hold me to that. There seem to be so many variations. Not joined Partymarkets, I remember checking them out ages ago but didn't join. Maybe their new account bonus wasn't worth it.

Yes I probably worded that badly, by saying 'rolling charges are included in the spread' what I meant was that there are NO rolling charges on future spreads like the GBPUSD quarterly markets because the spread is larger and so you pay 'up front' that way (if that makes any more sense than what I put originally!).

Partymarkets did have an offer just recently for up to £250 if you placed £250 worth of stakes, but to be honest I just kind of left that alone after I joined up, I thought I could do it but in the end I didn't bother.

Do you get any interest adjustments? Hmmm not sure if the base interest rates between UK and USA are different anyway?
I know that the basis of the "carry trade" is to sell the currency with the lowest interest rate and buy the corresponding currency with a higher one.
The spread company then pay you the difference between the two rates, but at the total value of the trade not the stake per pip. There is therefore a significant "leverage" to this trade. But I digress....perhaps a topic for another thread...?

I have no idea about that sorry. This is only my first quarterly contract I've taken out, so will see at the end of the quarter.

[musicbox]

Spreadbetting is something I've managed to completely ignore altogether to this point. I've grown my $ float to $9.5k now so perhaps I should look into this area a bit more to guard against currency movements. Is spreadbetting one of a number of ways of doing this or the way of doing this?

[munk]

Spreadbetting is something I've managed to completely ignore altogether to this point. I've grown my $ float to $9.5k now so perhaps I should look into this area a bit more to guard against currency movements. Is spreadbetting one of a number of ways of doing this or the way of doing this?

It's the only way that I know of. If you're thinking of getting into spreadbetting have a read through this:

http://www.thegamblingtimes.com/boar...er-1000-a.html

I found it really useful starting out. Or all the spreadbetting threads are tagged:

The Gambling Times - Threads Tagged with spreadbetting

I think my favourite spread site is Tradefair or Shortsandlongs, both of those have tighter spreads than PartyMarkets so they cost a little bit less, although Partymarkets is the only one that allows you to buy/sell less than £1 on their markets - especially on the GBPUSD market (there are probably others but I've not come across them yet ).

[Odysseus]

Spreadbetting is something I've managed to completely ignore altogether to this point. I've grown my $ float to $9.5k now so perhaps I should look into this area a bit more to guard against currency movements. Is spreadbetting one of a number of ways of doing this or the way of doing this?

Spreadbetting would be the easiest way as there are so many SB firms in the UK to use. Another way would be to buy/sell currency pairs with forex brokers/banks. In effect, the same result.

[Odysseus]

Of course then again... well £110 is maybe not a huge amount and some people will say what's the point in bothering?

It's all a matter of perspective. Some people do MB offers and arbs that only make a few £s. IMO if you're trying to extract bookie bonuses by MBing and trying to minimise losses as much as possible, it makes sense to cut down the variables and worrying about currency variation is soething you can do without. What's the point making several hundred pounds or more by MBing US books only to lose a substantial portion through currency variance.

[Odysseus]

I think in theory if you buy £1 per pip (assuming 1 pip = 0.0001 movement on the GBP/USD market which is the 'default' on most spread sites) you're hedging $10,000, but *don't* quote me on that!

I think you're hedging £10,000 not $ which is approx $16,800
Therefore to hedge $10,000 you need to spreadbet less than £1 per pip.
I've been playing around with a few calculations but can't seem to get it exactly right. The profit/loss based on a £x bet seems to vary depending on the % movement. I'm just not mathematical enough to work it all out but I suspect that to hedge $ exactly you need to be betting $x per pip not £x !
I'm sure there must be some definitive way of calculating this somewhere.

[munk]

I think you're hedging £10,000 not $ which is approx $16,800
Therefore to hedge $10,000 you need to spreadbet less than £1 per pip.
I've been playing around with a few calculations but can't seem to get it exactly right. The profit/loss based on a £x bet seems to vary depending on the % movement. I'm just not mathematical enough to work it all out but I suspect that to hedge $ exactly you need to be betting $x per pip not £x !
I'm sure there must be some definitive way of calculating this somewhere.

All I can say is what I said above really, you just have to play around with it. For me to hedge around $2-3k at the moment I need to buy roughly 10-15p on the GBPUSD market and that works out about right. I just looked at it every day for the first few days when I put the contract in 6 weeks ago to make sure it wasn't too far out and since then I've just left it and I look in on it every week or so to see how it's going and generally it's not too far out (although I do need to adjust it when the contract ends in December because my USD float has increased since I took the last contract out).