How to hedge USD
- Thread starter rayzzzz82
- Start date
To mike:
I dont take risky trades and hence this is why i dont overleverage. A depreciation of 3% over a year is fine as a return of 20% to 50% is enough to offset it. However a depreciation of 3% within a few weeks is not fine as it will eat into the profit severely.
This is no guarantee that usd to sgd will remain at 1.38. This is a chance that it will drop lower. No one know. So this is why i want to mitigate this risk.
If there is no way to completely erase the hedging cost. What is the possible to reduce the cost to a minimum?
I dont take risky trades and hence this is why i dont overleverage. A depreciation of 3% over a year is fine as a return of 20% to 50% is enough to offset it. However a depreciation of 3% within a few weeks is not fine as it will eat into the profit severely.
This is no guarantee that usd to sgd will remain at 1.38. This is a chance that it will drop lower. No one know. So this is why i want to mitigate this risk.
If there is no way to completely erase the hedging cost. What is the possible to reduce the cost to a minimum?
Hedging cost is determined by fx forward spread (which is iirc, ~60 basis pts for 12mth usd/sgd), but you are never going to find any broker who will offer you anywhere near that kind of rate unless you are trying to hedge billions.
Discount brokers like IB offers reasonable rates (1.91% for 100k and above), I'm certain your broker is charging you a lot more because thats how bucket shops make their money. You are going to have to suck it up if you want to stick with your current broker.
I understand what you mean. But as I am not a long term trader, I am not able to determine if it will depreciate by 5 to 10% or 30 to 50%.
There is always a chance and if possible, I will try to manage the risk to the best I can. If you have seen the value how much GBP has dropped since 2015, it has dropped from its high of 2.29 to the present level of 1.76, it is almost a 30% depreciation in 1.5 years.
The reason for me asking here is to find a possible way to hedge the currency at no cost or a minimum cost. If there is anyone who can advise me, I would greatly appreciate. Thanks!
There is always a chance and if possible, I will try to manage the risk to the best I can. If you have seen the value how much GBP has dropped since 2015, it has dropped from its high of 2.29 to the present level of 1.76, it is almost a 30% depreciation in 1.5 years.
The reason for me asking here is to find a possible way to hedge the currency at no cost or a minimum cost. If there is anyone who can advise me, I would greatly appreciate. Thanks!
To hindsight:
I do not understand what do you mean by 1.91% per 100k? Are you referring to the cost of borrowing 100K USD? I do not borrow any USD, rather my fund now is in USD.
Spread for shorting USD/SGD is around 1-2 pip for one standard lot. If you dont mind to recalculate again, based on that 1.91% per 100K, what would it amount to when compared as the swap overnight fees?
Forgive me for not able to understand some of your terminology used as I do not used IB for my trading.
I do not understand what do you mean by 1.91% per 100k? Are you referring to the cost of borrowing 100K USD? I do not borrow any USD, rather my fund now is in USD.
Spread for shorting USD/SGD is around 1-2 pip for one standard lot. If you dont mind to recalculate again, based on that 1.91% per 100K, what would it amount to when compared as the swap overnight fees?
Forgive me for not able to understand some of your terminology used as I do not used IB for my trading.
Mecisteus
Great Supremacy Member
- Joined
- Jun 16, 2002
- Messages
- 55,171
- Reaction score
- 11,857
Please don't ask silly question.
You want to eliminate that risk but you don't want to pay any cost?
The hedging tools are what already mentioned above. You can short, use options, futures or take FCY debt.
You want to eliminate that risk but you don't want to pay any cost?
The hedging tools are what already mentioned above. You can short, use options, futures or take FCY debt.
Its not per 100k, the rate only applies to margin balances between 100k - 1m, it gets lower as the amount increases. Its basically what you pay to maintain a dollar deficit in your account, or in your case, be without dollar exposure.
1-2pips pay day is what, 4% a year? Jesus...
I dont think I am asking silly questions.
I ask questions because I have not find any answers so this is why I turn to this forum for the answers.
I have already said that if I am not able to eradicate the cost totally, I am willingly to look at ways that will minimise the cost. But do at least offer a more viable solution.
I understand some of you might be trading other instruments or investing in some other alternate system. So would appreciate if you can explain how would you do to minimise the currency risk and the cost involved.
I ask questions because I have not find any answers so this is why I turn to this forum for the answers.
I have already said that if I am not able to eradicate the cost totally, I am willingly to look at ways that will minimise the cost. But do at least offer a more viable solution.
I understand some of you might be trading other instruments or investing in some other alternate system. So would appreciate if you can explain how would you do to minimise the currency risk and the cost involved.
To hindsight:
I think we are not along the same line. If I am not wrong, you are using IB where basically you are borrowing USD using the SGD balance in your account.
I am not using IB so what you are highlighting is not what I am looking for as I do not wish to "borrow" usd using sgd.
In forex, the cost are "spreads", "commission" and "swap". so we are measuring using pips.
If there is a way to hedge USD using IB. Please guide me. For example, using an amount of 100K USD, what is the step to hedge it? how much is the deposit needed and what would be the cost to hedge on a monthly basis? This would make thing alot simpler to understand.
I think we are not along the same line. If I am not wrong, you are using IB where basically you are borrowing USD using the SGD balance in your account.
I am not using IB so what you are highlighting is not what I am looking for as I do not wish to "borrow" usd using sgd.
In forex, the cost are "spreads", "commission" and "swap". so we are measuring using pips.
If there is a way to hedge USD using IB. Please guide me. For example, using an amount of 100K USD, what is the step to hedge it? how much is the deposit needed and what would be the cost to hedge on a monthly basis? This would make thing alot simpler to understand.
Its the same thing... when you sell usd against sgd you are essentially borrowing it, in your case you already have a usd balance so your net exposure is zero.
Only way to mitigate usd risk directly on IB is to short the pair, I don't think SGD fx futures is available on IB, could be cheaper if you have access to that.
BBCWatcher
Arch-Supremacy Member
- Joined
- Jun 15, 2010
- Messages
- 24,200
- Reaction score
- 5,363
I think somebody already mentioned it, but bear in mind that if you're holding an asset you're holding an asset, not the currency(ies) it is denominated in.
OK, with that important point in mind, you can get some "free" currency benefits if you are using Singapore dollar cost averaging to acquire assets. That is, you buy a fixed S$X per month (on the same day of the month) of your investment assets, month in month out, for years, preferably decades. If you can step up that X figure to sustain a higher level of dollar cost averaging, great, but consistency counts. Dollar cost averaging means you will naturally, automatically buy more of that asset when its Singapore dollar price is relatively low (which could be due to currency effects) and less of that asset when its Singapore dollar price relatively high.
Transaction costs can be higher to dollar cost average, especially for smaller dollar amounts, so you have to balance any higher transaction costs against the benefits of dollar cost averaging. Variations are possible, such as dollar cost averaging on a bimonthly basis, to mitigate any such higher transaction costs.
By the way, EWS is the ticker symbol for an exchange traded fund that tracks a Singapore stock market index (MSCI, but it's very similar to the STI). EWS is traded in U.S. markets. If you're a U.S. person and wish to have an index of Singapore stocks in your portfolio -- i.e. you want to make a bet on Singapore equities as a whole -- it's a reasonable option. For everyone else, including those concerned about exchange rates, I wouldn't recommend it.
FYI, the U.S. S&P 500 stock index is up over 15% over the past year in U.S. dollar terms, as I write this, and excluding dividends. The SGD-USD currency change is small compared to that big movement. When you're investing in stocks, you're investing in a class of assets that typically has much greater volatility than the SGD-USD path. So if you're concerned about SGD-USD volatility, you should be that much more concerned about stock market volatility. And if this stuff feels too risky for you, then now would probably be a good time to collect your profits and move your money to something like Singapore Savings Bonds and Singapore Government Securities.
Singapore, and the Singapore currency zone, are small. Very, very small. Something like 99% of the ways you can invest involve assets outside Singapore. This is just how it goes. Long-term investing with dollar cost averaging is the primary, prudent mechanism to deal with volatility. Or...stick to CPF, SSBs, and SGSs.
Or some of both, which is what I do.
OK, with that important point in mind, you can get some "free" currency benefits if you are using Singapore dollar cost averaging to acquire assets. That is, you buy a fixed S$X per month (on the same day of the month) of your investment assets, month in month out, for years, preferably decades. If you can step up that X figure to sustain a higher level of dollar cost averaging, great, but consistency counts. Dollar cost averaging means you will naturally, automatically buy more of that asset when its Singapore dollar price is relatively low (which could be due to currency effects) and less of that asset when its Singapore dollar price relatively high.
Transaction costs can be higher to dollar cost average, especially for smaller dollar amounts, so you have to balance any higher transaction costs against the benefits of dollar cost averaging. Variations are possible, such as dollar cost averaging on a bimonthly basis, to mitigate any such higher transaction costs.
By the way, EWS is the ticker symbol for an exchange traded fund that tracks a Singapore stock market index (MSCI, but it's very similar to the STI). EWS is traded in U.S. markets. If you're a U.S. person and wish to have an index of Singapore stocks in your portfolio -- i.e. you want to make a bet on Singapore equities as a whole -- it's a reasonable option. For everyone else, including those concerned about exchange rates, I wouldn't recommend it.
FYI, the U.S. S&P 500 stock index is up over 15% over the past year in U.S. dollar terms, as I write this, and excluding dividends. The SGD-USD currency change is small compared to that big movement. When you're investing in stocks, you're investing in a class of assets that typically has much greater volatility than the SGD-USD path. So if you're concerned about SGD-USD volatility, you should be that much more concerned about stock market volatility. And if this stuff feels too risky for you, then now would probably be a good time to collect your profits and move your money to something like Singapore Savings Bonds and Singapore Government Securities.
Singapore, and the Singapore currency zone, are small. Very, very small. Something like 99% of the ways you can invest involve assets outside Singapore. This is just how it goes. Long-term investing with dollar cost averaging is the primary, prudent mechanism to deal with volatility. Or...stick to CPF, SSBs, and SGSs.
Or some of both, which is what I do.
Last edited:
"How to hedge USD currency risk?"
I am looking for no / low cost way to hedge against USD fluctuation. I appreciate all the insightful comments here. But somehow I have not gotten the answer specific to my question.
I am grateful on the advice on teaching me how to invest using DCA in index, SSB or whatever investment, but I am not asking for tips for investment. Apologises if I might sound rude. But I am currently making reasonable profit using my present trading strategies.
The reason I am asking here if I am holding a relatively large sum of fund in USD and I have no idea how to hedge against this risk. I would really be thankful if there is any low cost way to my problem. Thanks again!
I am looking for no / low cost way to hedge against USD fluctuation. I appreciate all the insightful comments here. But somehow I have not gotten the answer specific to my question.
I am grateful on the advice on teaching me how to invest using DCA in index, SSB or whatever investment, but I am not asking for tips for investment. Apologises if I might sound rude. But I am currently making reasonable profit using my present trading strategies.
The reason I am asking here if I am holding a relatively large sum of fund in USD and I have no idea how to hedge against this risk. I would really be thankful if there is any low cost way to my problem. Thanks again!
Mecisteus
Great Supremacy Member
- Joined
- Jun 16, 2002
- Messages
- 55,171
- Reaction score
- 11,857
BBCWatcher
Arch-Supremacy Member
- Joined
- Jun 15, 2010
- Messages
- 24,200
- Reaction score
- 5,363
No, you're holding shares of the fund, shares of the assets the fund holds. Unless you're invested in a fund that holds lots of U.S. dollars or dollar proxies -- for example, a U.S. government bond fund -- then you're not holding U.S. dollars.
The fund you hold can be expressed in any currency(ies) you wish. If you want to see what that fund is worth in Kenyan shillings at this instant, you can calculate that. But that doesn't mean you're holding Kenyan shillings either.
(a) Singapore dollar cost averaging works.
(b) There is no b. You're (otherwise) asking for a unicorn. No rational entity will insure you against currency risks without payment from you. The more and bigger and longer the currency risk you want to hedge, the bigger the payment. You can do that! But currency hedging, to any reasonable or better degree, is not what most people would consider "low cost."
Last edited:
Mecisteus
Great Supremacy Member
- Joined
- Jun 16, 2002
- Messages
- 55,171
- Reaction score
- 11,857
There is 1 zero cost way of hedging. Don't initiate any position at all. Or close all open positions and incur 1 time cost. 
Even if there is such a thing as a low cost hedging tool, SIA wouldn't have lost big time with their oil hedges.
Over the long term, strong currencies are likely to appreciate or depreciate in small % annually against each other.
I used to hold USD debt in IB and paid a few thousands of interest charges annually when the rate was lower. Of course, my profits were >10x higher than the interest charges. Since the USD interest rate is higher now, I reduce my USD debt significantly.
Even if there is such a thing as a low cost hedging tool, SIA wouldn't have lost big time with their oil hedges.
Over the long term, strong currencies are likely to appreciate or depreciate in small % annually against each other.
I used to hold USD debt in IB and paid a few thousands of interest charges annually when the rate was lower. Of course, my profits were >10x higher than the interest charges. Since the USD interest rate is higher now, I reduce my USD debt significantly.
Shiny Things
Supremacy Member
- Joined
- Dec 13, 2009
- Messages
- 9,590
- Reaction score
- 830
You're going to have to pay the swap points somehow.
If you sell USDSGD to hedge, your broker's going to charge you the overnight rolls.
If you sell USDSGD futures, you're going to pay in curve rolldown.
"Swap-free" accounts don't mean that you don't pay the swap fees; they just mean your position gets closed at the end of day and then reopened one second later at the new start-of-day rate. (You used to be able to arb the Islamic brokers in the way I think you're thinking about, but they all got wise to that when they realised that every single one of their customers was just selling absolute truckloads of BRLJPY and sticking the brokers with the swap points.)
If you're using IB (I'm having trouble figuring out whether you are or not), then you shouldn't have a problem; just sell USDSGD and let the trade settle. YOu'll end up with a positive balance in SGD; and then when you want to trade, you can just buy the amount of USD you need.
If you use Saxo, they can offer you USDSGD forward contracts, but I suspect they'll be pricey.
If you use another broker, maybe just find a better broker?
sAVaGEmP5
Arch-Supremacy Member
- Joined
- Jun 27, 2002
- Messages
- 12,815
- Reaction score
- 2,321
U have a few ways...
1. Assuming u are singaporean using SGD as ur base, everytime u convert sgd to usd, u short usd/sgd. Yes u need to pay swap/interests/ whatever to keep the status open. But that fees u pay protects u from downside.
2. Buy US dollar indexes as an alternative hedge. U might even profit form it, or lose, but u dun lose or win completely. Even so, it may not be a perfect hedge. Theres no perfect hedge anyway.
3. Finally this is not a solution, how many millions do u have in usd ? Im not sure abt how much u have, i've gone past the amount more usd than i have in sgd. In a way its abit imbal as im earning usd faster than sgd too. Park your fx losses as operational losses (since u are using it as part of ur income speculation)
4. If u had followed usd from 2009, u probably gained (i've gained 20% of usd since the $1.2x era) so unless u are pretty sure usd will drop in the long haul (which i doubt so ... lets see 2017 wtih 3 interest rate hikes) i suggest not do a perfect hedge.
5. With the USD "cash" u have in ur trading acount (cash being unused cash and not cash in terms of equities, it actually gives u quite a good rate of 0.75 to 1.25% depending on rate hikes. Not a bad deal actually
treeskull
Greater Supremacy Member
- Joined
- Mar 24, 2015
- Messages
- 87,309
- Reaction score
- 13,873
BBCWatcher
Arch-Supremacy Member
- Joined
- Jun 15, 2010
- Messages
- 24,200
- Reaction score
- 5,363
That's a joke, right?
Important Forum Advisory Note
This forum is moderated by volunteer moderators who will react only to members' feedback on posts. Moderators are not employees or representatives of HWZ Forums. Forum members and moderators are responsible for their own posts.
Please refer to our Community Guidelines and Standards and Terms and Conditions for more information.
