Hedging the Sterling against the Dollar or Euro

Q. How do I hedge against the Euro continuing to gain against the Sterling using a spread bet?

As an amateur I'd have no idea how NOT to hold sterling. Setting up bank accounts abroad and transferring money back and forth, calculating exchange rate gains against losses on the fees charged for the exchange...it's way beyond me!?

A: It's actually very easy to hedge against Sterling depreciation - without having to resort to converting your savings into foreign currency.

Spread betting a very simple mechanism for doing this and, if done correctly, is not the huge 'gamble' that many would have you believe.

Let's imagine you have a £50k cash pot that you're considering converting into Euros. As stated above, you could go to the hassle of:

- Opening a Euro-denominated savings account
- Exchanging the £50k into Euros
- Depositing the money
- Waiting
- Converting it back into GBP when you need it

Alternatively you could:

- Open an account with Capital Spreads and deposit around £2000.
- Open a position 'buying' EUR/GBP futures to the tune of £6 per point.
- Sit back and relax.

How does this work? Well, EUR/GBP June futures are currently trading at '7510'. This number derives from 1 Euro costing 0.7510 pounds. If you place a bet at £1/point then you will make £1 for every point that the EUR/GBP goes up, and will lose £1 for every point that it goes down. As you've placed a bet for £1/point at 7510 you effectively have £7510 'invested' in Euros. If the Euro appreciates by 5%, you'll make 5% of £7510 in profit.

So, stretch this to £6/point at 7510 and you've effectively 'invested' £45,060 in Euros.

The one thing you of course need to be aware of is that if the Euro devalues against the pound and the index falls back to, say, 7210, you'll have lost 300 x £6 = £1800. A spread betting dealer from the company will then call you and say 'You only deposited £2000 and you've lost £1800. Please put more money in your account or we'll close your positions". This is known as a 'margin call' and isn't a nice call to get. But equally, you've lost no more than if you'd turned all your £50k savings into Euros and had the market move in the same way. The key is being able to fund that liquidity if you need to...and remember, you still have £48k sat in savings, earning interest!

As I say, please DO NOT spread bet silly amounts without understanding what you're doing. However, the point I'm trying to make is that you don't need to go converting all your savings into foreign currencies to benefit (or protect) yourself from GBP devaluation. Spread betting is a useful tool if used correctly in a disciplined manner. If you are confident in which direction you feel the currency is going medium to long term, do not let the 'it's too difficult' excuse get in your way of taking action!

Q. How do I hedge against the Dollar continuing to gain against the Sterling using a spreadbet?

A: A little hedge goes a long way. I'm being lazy and have copied this over...so it's out of date but it gives you the idea. £1 per point...

Cable rises from $2 / £ to $2.06 / £
(Dollar depreciates against sterling)

Your $40,000 is now worth $38,800 in sterling terms so your account has depreciated by the equivalent of £583 ($1200)

At £1 per pip (1/100th of a cent) the balance in your spread betting account has risen by:

£1 x 600 pips = £600

You can also hedge your currency exposure using an expiry bet at Betonmarkets - you could work out the price you would like to hedge at and set it for 362 days time, the problem with a spread bet is that as you know things don't move in a straight line and you leave yourself wide open to a pound rally, personaly I think the dollar might continue to gain against gbp but in these markets who knows! Spread Betting on Currencies is explained in more detail here

Q. I am planning to build a house in France and have applied for planning permission. However, the current strength of the Euro is a problem...

I am planning to build a house in France and have applied for planning permission. However, the current strength of the Euro is a problem. The real cost to me in sterling has increased by about 15% over the past 6 months. I have most of the cash I need already but don't want to transfer the money to France before I get planning permission. Is there any easy way of hedging my risk?

A: You can go long on a quarterly future (i.e. time limited bet e.g. March which you can close whenever you wish) and roll it every 3 months, this trades slightly wider than spot. At the end though you will still need to physically transfer GBP to EUR (i.e. close the position when you have transferred your capital into Euros).

Alternatively, you can take a rolling daily position (i.e. daily spread bet) which can be maintained for as long as you like but which needs to be rolled every day, I haven't looked at this in detail - but if you keep rolling a daily bet for months on end this can end up costing quite a bit. At the end you will still need to physically transfer GBP to EUR.

Work out how many £ you lose on your costs per 0.0001 move in the forex rate (assuming this is expressed in £ per 1 euro as per CityIndex) and then buy that amount (buy if quoted as EUR/GBP, sell if quoted as GBP/EUR). If the exchange rate (£ per EUR) is 0.7912 then it may be quoted as 7912. So if you were to place a £1 per point bet buying EUR/GBP and the rate moves to 0.7913, you would make £1. Profit on your bet will offset any losses if the rate moves even higher, and vice versa.

Bear in mind that you will need to place cash as collateral when you do this - margin/collateral is around the 5% ratio, but this obviously depends on the spread betting firm you use. Also, if the pound strengthens and you make a loss that eats through your collateral (margin) you will need to put up more cash or close the spread bet. i.e. you can lose more than the cash you put down. So roughly to cover a £100,000 position you will need to put up £5000 upfront just to open the spread bet - if this then moves £4000 against you will need to have £9000 in your account to keep the position open. If you get your sums right you should be making the same on your house costs, BUT the gains/losses on the spread bet are calculated daily, so you could be putting more cash in on the spread bet while you won't see the gains on the house costs until you've placed your house cash in Euros.

A third option would be to physically transfer the pounds to Euros and put them in a euro bank account, there are a couple of companies that will do this for about a 10-20 pip spread + 10-15 quid transfer fee on one side.

You can always half your GBP amount now and half your GBP amount later. All depends a bit on what you are happy with. So if you know that you are definitely going to need Euros, just transferring the gbp into Euros and sticking the Euros into a Euro bank account is probably the easiest (if you have or want to open a euro bank account).

As you're still waiting for Planning permission, maybe the easiest thing is to do quarterly futures, the next lot expire in March. And remember that if you pull out of building the house, you still have to pay any losses you have made on the spread bet.

 ...Continues here - Hedging Against Market Crashes

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