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I have a EUR cash account with Interactive Brokers and I trade US stocks. So I converted my euro’s for dollars. But now when my US /dollar stock portfolio is up but eur/usd is down it is hurting my performance.

What is the best way to hedge this currency risk? And what is the cheapest option? And preferably can this be done without using margin?

Thanks guys, Rick

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Using FX Futures Contracts is the standard way of hedging currency risk.

Lets assume that you want to invest 125k EUR in US stocks. In the moment you exchange the 125k EUR to USD, you also buy one Euro FX Futures Contract - https://www.cmegroup.com/trading/fx/g10/euro-fx_contract_specifications.html.

As long as you hold the US stocks you will have to rollover the futures contract and when you sell the stocks, you also close the futures position. Your 125k EUR initial capital is 100% protected to currency rate fluctuations. If you want to protect the P&L as well, you can make future position size adjustments at rollover time.

Just to add that you need a margin account in order to transact futures. It would not work in a cash account.

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  • So if I buy a EUR/USD futures contract for 125.000 euro that covers a 147.000 dollar stock portfolio. And then I am currency risk neutral right? And that cost would be 125.000 euro x 1.60% (IBKR website) so 2.000 euro’s a year. Correct? Sounds like a lot 1.60% of lost performance. Isn’t there a cheaper more efficient way? – Rick Aug 5 '20 at 8:30
  • No. As of today, it costs you absolutely nothing to hold the EUR/USD futures contract - some mathematics to support here docs.fincad.com/support/developerfunc/mathref/FXFWD.htm. As long as the interest rates in those two currency are identical, your carry trade cost will be zero. You only pay IBKR commission cost, once every 3 months, for rolling over the contract - 2 x $1.62 – Kim Gold Aug 5 '20 at 15:22
  • Huh? But wait. If I have a 100.000 in euro’s. Deposit that in my IBKR account, convert it to USD. Buy US stocks with that, and after that buy EUR/USD futures contracts worth 100.000 euro I have to pay IBKR for the margin loan used of the nominal value of the futures contracts. So 100.000 x 1.60% right? Since I had only a 100k. Not 200k. – Rick Aug 5 '20 at 18:46

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