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Background: I started playing with the stock market in April-May, drawn by the huge rebound. Since then, I have made what I think is a decent return, except...

I live in the EU, and most of the dollars I poured into NASDAQ & co came from exchanging euros at what turned out to be the worst rate in years. (Oddly enough, my trading platform even makes me use $ when buying European stock from EU markets, like Airbus). The rise in the euro since spring means my ~15% stock market gains becomes a much less impressive ~5% gain when converting back. So I am looking for a way to balance the cool gains to be made on the US market against the exchange rate.

My idea is to use ~17% of my funds to buy the EURUSD index on 5x leverage, creating a position about as big as the rest. This leaves me the rest of my funds for stocks, while compensating for any fluctuations in exchange rate. I am aware this still leaves open some risks:

  • missing out on possible gains if the euro falls back down: I can live with this; profit from forex is not my goal
  • some possibility of a margin call: I'm ok with the risk, since the wild swings of the stock market are rarely seen on exchange rates; if my position just gradually declines toward a margin call, it's fine, since my dollars are now stronger
  • cost: of course there is a fee for a leveraged position; it works out to around 175$ a year for 10k$ "protected", so less than 2% per year. Considering this year had more than 10% variation in exchange rate, it doesn't sound bad

All this considered, it sounds like a decent idea. Yet I can't escape the feeling it's dumb for some reason I can't see. Is there anything I'm missing?

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    Take a look at this discussion in a similar question, here: money.stackexchange.com/a/133526/44232 . In short, consider whether hedging against the USD value directly is perhaps interacting in an undesirable way with what a US-based investment really means. ie: when you buy the NASDAQ, you are investing ultimately in long-term growth of the US economy [at least, in the way that economy impacts public companies]. By then hedging against the USD, you are changing the value proposition of that 'play'. Perhaps in a positive risk-reducing way, but perhaps in a value-reducing way, as well. – Grade 'Eh' Bacon Dec 7 '20 at 15:09
  • Are you just trying to do a forward exchange contract? – Lawrence Dec 8 '20 at 1:18
  • @Grade'Eh'Bacon thanks for the link, it's food for thought. I am somewhat more short-term focused, though, so I'll consider the impact on my situation. – Makotanist Dec 8 '20 at 8:27
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You've basically answered your own question: it's not usually the best idea because the fees are large which quickly are a huge drag on compounding growth, and when using margin like this in cases of really big swings in currency you still get margin called/wiped out (eg market AND this hedge go against you you're down a lot here). Volatility in currency markets looks stable vs stocks but currency history is littered with moves like the Swiss Franc unpegging in 2011 with its subsequent total carnage on levered players precisely because they thought it was stable and had used a lot of leverage as a result.

Currencies are not typically appreciating assets - in the long run they generally just bounce around against each other amongst developed economies and stay roughly constant in the very long run. It's worth asking yourself if you would still be keen to do this if the market had moved with you and massively upped your returns, as implementing this strategy is basically robbing your future self of that moment if/when the movement flips, as well as paying a solid chunk of your expected compound growth out on the way.

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