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I want to open a short position for USD/JPY that I intend to leave alone for a while in order to currency hedge my investments.

Last year, my US stocks appreciated quite a bit and I don't want to ride that roller coaster again, especially on the way down.

However, my broker has negative swap(-70 JPY/lot) for selling USD/JPY so I'd be losing money every day no matter if the pair goes up or down. Sure it's not much, but in 5 years it would be at best about -1%.

Does it make sense to buy a small amount of NZD/JPY(+800 JPY/lot) say 1:10 to cancel the swap or is the additional NZD currency risk not worth it?

As I see it, given that it's a long position, even if an asteroid were to hit New Zealand, I'd only be off about %5 of my US stock+hedge portfolio.

Hedge worst case |-5%| > no hedge best case |-1%|, but what about the average/expected case?

  • Just remember that you are using leverage of 20,50 or 100 to 1 with Forex. The daily negative carry trade will eat at your balance and might get you margin called even without the price moving much. – Jamie Bush Mar 1 '15 at 13:55
  • @JamieBush Sorry if I am misunderstanding you, but the whole point of this probably misguided strategy is that I am getting positive carry. I'm also playing relatively safe with the actual leverage which is not the same as the nominal one. – gengren Mar 2 '15 at 2:28
  • Sorry, I got the trades mixed up and thought you wanted to short the USD/JPY pair. You're correct that the NZD/JPY pair is a positive carry trade. – Jamie Bush Mar 4 '15 at 2:26
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I decided to try this in order to get a feel of it.

As far as the interest rates are concerned, it works. You can set it up and forget about holding time as long as the rates and positions stay within a range.

The problem is that currency volatility turns the interest paid for shorting USD/JPY into noise at best.

And if you look to past performance over a year... Let's just say there is a reason they pay you to hold NZD.

So, unless you think buying NZD/USD is a good idea to begin with, you should put your money elsewhere.

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