Given the recent downturn I have started to modestly increase my exposure to stocks by utilizing slight amounts of portfolio margin.
This results in a growing margin loan that is dollar nominated. As a result I am starting to accumulate a sizable position that is equivalent to shorting the dollar in comparison to the franc.
The question is the following: should I hedge this exposure by having an equal amount of margin loan in CHF and USD? Or should I just stay with a 100% margin loan in USD.
Personally, I would feel that over a long amount of time (>5 years) the CHF should be stronger than the dollar. But this should not affect this decision.
To minimise risk in your case I think best is to match the currency of assets & debt as far as possible. If you are investing in global companies then much of sales are linked to USD.
Example: In the last crisis in ~2008 share prices denominated in USD crashed. In CHF terms they crashed even more. CHF is seen as a safe haven currency, investors flocked to CHF which strengthened sharply.
If there is not a crash, interest rate parity theory would say because USD forward interest rate is higher the USD should decline over time vs CHF. In the meantime a small advantage for you as a Swiss resident borrowing in USD is that you should be able to deduct higher interest expenses from your taxable income each year.
Yes, however, the margin interest rate for USD is also higher, so it evens out based on interest rate parity.
I wouldn’t want a loan in a foreign currency unless the asset is tied more closely to a currency (e.g. mortgage for foreign real estate). That said, I don’t want the risk of leveraged investment in the first place, so I’m probably the wrong person to comment on that aspect.
Okay thanks for your replies.
Given that I own 100% VT then based on Barro’s answer I should be fine with a 100% USD denominated loan?!
The difference in interest rate was <1% the last time I checked. Therefore, currency movements should be the bigger factor.
But happy to hear more thoughts.