Is there a hedging method against currency risk without lowering returns ? Classic hedging methods like forwards, futures options, all have a cost and don’t remove risk “for free”.
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3I would expect "You don't get something for nothing" applies. If you could remove risk for free, the risk essentially wouldn't be there in the first place (there'd be no reason not to remove it all the time). If it costs something to remove risk, you have the trade-off between high-risk (of higher gains/losses) or lower risk (of more modest gains/losses).– TripeHoundMay 1, 2018 at 6:57
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Your comment should probably be an answer. This is correct.– ApplePieMay 1, 2018 at 12:42
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Risk and reward go hand in hand. To get less risk you have to give up reward. To get more reward, you have to take on more risk. IOW, you can shift the R/R spectrum (lowered risk) with options for little to no out of pocket cost but that is achieved from an opportunity cost (less reward).– Bob BaerkerMay 1, 2018 at 14:00
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2 Answers
In a word: "no". Essentially, the old adage:
You don't get something for nothing.
applies.
If there was a way of removing risk for free (i.e. without lowering returns), then that element of risk essentially wouldn't be there in the first place (there'd be no reason not to remove it all the time).
If it costs something (in lowered returns) to remove (some of) the risk, you have the normal trade-off between high-risk (= higher gains; deeper losses) or lower risk (= more modest gains; lower losses).
answered May 1, 2018 at 16:40
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Joined just to upvote this answer. The mindset betrayed in this question is the most persistent disease in finance, at all levels, expressed one way or another, and the rest of us have a duty to vigilantly dispel it, as exhausting and disheartening playing whack-a-mole feels like.– Dan BronMay 17, 2018 at 11:43
Options have cost, true, because you can limit the downside while keeping upside potential.
However, forwards and futures just have transaction costs, which are usually minimal. The only "cost" is that you lock in a exchange rate, so you lose both upside and downside potential, and the rate you can lock in may be worse than the rate you get now.
So FX futures could be used to reduce currency risk with little to no cost. Whether you can perfectly hedge risk depends on the size of your risk (exchange contracts are usually on the order of thousands of dollars) and the timing of future transactions (exchange delivery only happens once per month)
answered May 1, 2018 at 16:56
