I've been curious for a long time now about a specific hypothetical scenario for my personal situation. I'm a US citizen living and working long-term in Switzerland, and I've kept most of my day-to-day spending (groceries, travel, etc.) in US credit cards. I also (by virtue of being a US citizen) keep 100% of my investments in US domiciled funds, but there's lots of literature out there to show that long-term investments with recurring cashflows generally do not benefit from currency hedging, so I don't keep any specific CHF/USD hedges.
For short-term expenses, though, let's say I maintain a cash cushion of $5,000 in a US checking account to be able to pay monthly credit card expenses of anywhere between $2,000 and $4,000. If I somehow was perfectly spending 100 CHF per day and equally making daily swaps of 100 CHF -> USD, I'd be obviously completely unaffected by currency rate fluctuations.
On the other end of the spectrum, if I made a purchase mid month of 12,500 CHF, via an exchange rate of 1.00CHF/USD (debiting my US CC $12,500), and then at the end of the month the exchange rate was 0.90, I'd need to transfer 13,888 CHF in order to pay off that $12,500 debt. In this hypothetical scenario, I could somewhat easily hedge, say by buying 1 contract ($12,500) of MSF micro CHF/USD futures on the mid-month expense date, and I'd almost 1:1 wipe out the 1,388 CHF loss on the rate decrease by selling that future on the end-of-month transfer date.
However, in real life, there's no way I'm going to even monthly, let alone weekly or daily calculate expenses and execute futures trades to hedge accordingly, and even if I did, there are significant drags (interest on the futures margin loan, trade commissions, other fees) that would wipe out lots of the 'protection' from the hedge, no? Even in the case of the 1,388 CHF 'protection' of the hypothetical scenario above, I'm going to lose a significant amount of that value to these drags, right? Am I missing anything in this analysis?
