Double Exposure in International Markets?

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huss1652
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Double Exposure in International Markets?

Post by huss1652 » Wed Sep 05, 2012 7:26 pm

I was thinking of adding the Euro Bund (10 Year Bond) to my portfolio but noticed that it trades with EUR currency. Since this is not USD denominated, will I be carrying exchange rate risk along with the bund risk? Any further insight/explanation of this topic would be much appreciated. Cheers and happy trading!

sluggo
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Post by sluggo » Wed Sep 05, 2012 8:16 pm

That's a question to ask your broker; it can vary.

Usually, brokers require you to place a margin deposit before you can trade. If you trade products whose futures contracts are denominated in (currency X), usually the broker automatically converts the appropriate amount of (your base currency) into (currency X). Thus you are now holding some (currency X) and if the currency conversion rate fluctuates between (currency X) and (your base currency), you are exposed to these fluctuations.

I went to a random broker's website and snapped this image of their margin deposit requirements for the Bund futures traded on the EUREX in Frankfurt, Germany. If you want to trade 5 contracts of Bunds at this particular broker, and hold the position overnight, your margin deposit will be (5 x 4187) = 20,935 Euros. This broker will convert the appropriate amount of (your base currency) to equal 20,935 Euros.

Talk to your broker about it. That's what you're paying her for.
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Moto moto
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Post by Moto moto » Thu Sep 06, 2012 3:44 am

adding to Sluggos comment.....
A lot will depend on the instrument and the manner in which you trade it. eg;
- for futures you probably only require the margin,
- for swaps margin only
- for equities that are not in your own name, maybe or maybe not margin, you might require the full amount.

The broker should be able to tell you exactly what happens in your account with examples.

Also be aware that you PL may also be exposed to the currency fluctuations.

The other thing to remember is that its is your exposure to the currency, not your actual long or short position in the instrument that is important in this case. I have seen it where the FX hedge was reversed when one person thought that by shorting an instrument they had the reverse FX exposure to the currency.....not so.

huss1652
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Post by huss1652 » Thu Sep 06, 2012 3:31 pm

The currency conversion rate fluctuation are what I am worried about. Since this is not taken into account in the Bund price, would one need to short the FX in order to remove the currency exposure to have PL based on contract price alone? Otherwise, your Bund could have a positive return but overall could be negative if the currency went against you, correct? Or do I have it wrong?

Moto moto
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Post by Moto moto » Fri Sep 07, 2012 4:37 am

your broker should be able to explain this to you with examples, as some brokers may report everything back to you in your base currency or keep separate FX exposures open. (a leading brokers accountant when explaining this to me a few years ago told me most clients dont ask, dont know, dont care - and every broker may be different).

....but basically.....

you have an account in USD +$1
you trade in something in EUR, and the broker requires a margin in EUR +$0.2
This margin and the PL from the trade are where you FX exposure lies.
so at your broker you may have after the trade
USD+0.8
EUR +0.2 (or equivalent) ---- this is the part + PL of the bund that moves up and down
Bund Exposure (X EUR)

So to hedge this (and it will change every day - you would sell .2 EUR, buy USD) The brokerage account should show this - if it does not (suggest ask broker why not and move shops)

not to be confused with a straight FX trade where by you might have a larger exposure OR where you to have to transfer more than the margin over there in the case of having to purchase something in the country.

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