Please help me hedge!!

Discussion in 'Newbie Questions' started by monkeychimp, Jul 26, 2016.

  1. monkeychimp

    monkeychimp Newbie

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    Hi, I will try and keep this short and simple. I'm moving to the USA soon from the UK. GBP has taken such a hammering over brexit that it has already made it a lot harder. I would like to leverage some of my savings in order to hedge against further devaluation of GBP against USD. Can anyone please give me an idea of the best way to do this please? Im bearish sterling and cant see much hope for upside so I'm guessing I should be shorting it but I am unsure of the position sizing in percentage terms in order to achieve a hedge. Not looking to profit, just trying to protect my savings so they are still useful when I come to move. Thank you for any help you can give.
     
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  2. Enivid

    Enivid Administrator Staff Member

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    Why don't you convert now if you expect to be spending in USD?
     
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  3. Jason Rogers

    Jason Rogers Master Trader

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    Welcome to the forum, MC :)

    Since your goal simply to hedge the value of your savings, not to profit from speculation, then you position sizing should be determined by the amount you have saved. For example, if you have £1 million then you can short 1 million GBP/USD. The way this position size is displayed will vary from one platform to the next but the concept is still the same.

    On our Trading Station for example, this trade size would be displayed as 1,000K of GBP/USD (where K stands for 1000 currency units). On MT4, this would be displayed at 10.00 of GBP/USD in volume where 1.00 is one standard lot of 100,000 currency units. Regardless of the platform you choose, when you short 1 million GBP/USD, then you will make $100 each time the exchange rate drops by 1 pip, and you will lose $100 each time the rate rises by 1 pip.

    Here's an example based on the current GBP/USD exchange rate of 1.3133:

    You short 1 million GBP/USD at this rate. That means, you've effectively sold 1,000,000 British Pounds for which you've received 1,313,300 US Dollars. Suppose that by the time you move to the US, the GBP/USD exchange rate has dropped to 1.2500. At this time, you decide to close out your short 1 million GBP/USD position, since you've already transferred your savings to the US. To close or cover this short, you must buy back the 1 million GBP a the current rate, which costs you $1,250,000. Since you originally received $1,313,300 your hedge made $63,300 or $100 for every pip the exchange rate dropped. This will offset the loss in your GBP savings which you were hedging.
     
  4. radex78

    radex78 Active Trader

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    How if used to buying gold, often hear is this commodity included safe heaven, but I don't know sometime gold fall deeply
     
  5. Jason Rogers

    Jason Rogers Master Trader

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    You're right on two counts, Radex. Gold is often used as a safe haven, but it's price can also be quite volatile. That said, I don't believe gold would apply to the OP's question. He's specifically looking to hedge his exposure to the GBP/USD exchange rate, since he's relocating from the UK to the US.
     
  6. monkeychimp

    monkeychimp Newbie

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    Thank you so much for the quick replies! I will have to spend some time digesting the options but one question immediately springs to mind. Wouldn't creating a buy and short position of equal sizes be effective as a way to protect myself from loss?
     
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  7. Jason Rogers

    Jason Rogers Master Trader

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    Remember your original goal with shorting GBP/USD is to hedge the value of your British pound-denominated assets which you will convert to US dollar-denominated assets when you move from the UK to the US. While a rising GBP/USD rate would cause you to lose on your short position, this loss would be offset by the increased value of your British pound-denominated assets when you convert them to US dollar-denominated assets. By shorting GBP/USD right now, you are effectively locking in the current exchange rate regardless of when you complete your move to the US.

    If you were to add a long (buy) position in GBP/USD, then that would negate your hedge and leave you no better off than you started: exposed to the risk of a falling GBP/USD rate.
     
  8. Xavefif

    Xavefif Master Trader

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    Hedging is quite a specific thing, you can't go into it without special knowledge, you can read about hedging on this forum, as well as google it.
     

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