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Jeffrey, RTs,
> Anyone position trade non-US futures market on foreign exchanges? If
> so, do you hedge the underlying currency risk?
As a foreigner (Italian) trading US markets I am facing the same problem. Here are my
thoughts.
1. When trading stocks you should hedge the inherent currency risk, unless you're
willing to take position on the stocks and the currency at the same time. Let's say that
- from my point of view - with rising US stocks and Dollar, there was no need to cover,
but one has to understand one is taking a double risk.
2. When trading futures I wouldn't care about the future itself. I'd hedge the amount in
my trading account if in a different currency. Mine is in Dollars, should the case be I
would hedge it.
> If I am long one German bund (DM 250,000) and the interest rate does not
> change but the D-Mark price moves from 5700 to 5600, wouldn't it be true
> that the value of my position would have gone down by US $2,500?
Althought this is apparently true the underlying assumption that you own 250,000 DM is
wrong. The gain/loss from your position shall be in DEM so you should care only about
the latter amount not the value of the contract.
I'd add that since the future's price is settled in DEM and not in USD, it won't be
altered by currency fluctuations: so there is no need to worry about a system's signals.
> That clearly would be the case if I were long two contracts of D-Mark
> (DM 125,000) and the price moved from 5700 to 5600; I would lose US
> $2,500.
And this is one of the reasons why US-traded currency futures trade in US terms, instead
of European (where the USD goes from 1.7543 DEM to 1.7857 using the figures in your
example).
3. How to hedge. I made up my mind using futures, or futures options, since I can easily
do that from my futures account.
Again, I wouldn't authomatically hedge all my currency exposure, but I'd consider it as
a trading vehicle too.
Alberto Torchio
Torino, Italy
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