Currency hedging

Investing / Portfolios
111

So it is a flexible liquid 70% (i.e. you could stop it fully or partially and get everything out without reductions at any time).

You say it is collateral. Do you actually have a net position in USD? For example, if you hold a notional 100% of the USD collateral in long ES futures (long S&P 500, short USD), you will have no exposure to USD and only to the S&P 500 (plus minus some friction). If you overlay that with an additional S6 futures (long CHF, short USD) your net position will be:

  • +100% S&P 500
  • -100% USD
  • +100% CHF

The attempt at hedging resulted in a (negative) exposure to USD. That is not what you wanted, you wanted no exposure.

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112

Correct, I’d pay some transaction fees and some spread but it’s still minor. The positions are liquid.

My trading strategies are what I call delta neutral (Like I would for example hold a long ES + short ES the same size somewhere else). So my net position at anytime is just 100% USD.

Now, what i’m talking about is hedging at least part of that USD exposure by overlaying some long CHF, short USD position somehow.

113

Do you mean short and long different stocks from the S&P 500 index? Or is this options trading? Arbitrage on ES futures seems to be more an area for high-frequency traders with direct (expensive) access to exchanges.

I assume you have leverage. Could you hold your algorithm at 100% net stocks instead of 100% net USD?

Alternatively, S6 or ES futures could reduce net exposure to USD to 0% in favor of something else (CHF or S&P 500). Futures need a small collateral (<10% of notional). At IBKR that is cash without interest. Every day the futures are marked to market and cash changes hands. Short-term this could come from a margin loan on your 30% ETFs (so you don’t get liquidated and don’t need to hold even more cash ready).

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115

Ah, now it makes sense.

The spreads in highly liquid futures are next to non-existent. Can’t be 0 else there would be a trade. You just roll (sell old contract and buy the new one) before maturity, but since friction is very low, you won’t lose much. The highest volume is normally some days before maturity.

Of course over the whole duration you will continuously lose/gain the expected cost of carry (interest difference for currency futures). If you hold to maturity you get exactly the expectation when you bought (plus price movement). But until that day there is some variance from changing expectations (plus price movement).

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