FX hedge help needed pls

[RichS]

I’m currently living out of the UK. However I want to de-risk myself to FX movements. I am working for a Canadian bank.

In January I will receive £x,000 as a bonus. It will be converted by my employer into Restricted Share Units in my Canadian employer. So my £x,000 will buy GBP£/CAD$ exchange rate worth of Share Units at the then share price.

The Units will then go up or down depending on the fortunes of my company. I am ok with that share volatility and in fact I don’t think I am allowed to hedge against it.

Then in 12 months the “shares” are effectively sold and convert back to CAD$ which then gets sold for £GBP at the then prevailing CAD$/£GBP market rate.

How do I derisk the FX if for example we have a barnstorming Brexit and £GBP strengthens massively against CAD$ over the next 12 months? Basically I want a contract to pay me out the difference if £x,000 is worth less CAD$ in a year’s time that it is on day 1. What is that called and where can I get it easily? Is such an instrument available even to Joe Public? I could try our own FX trading desk I suppose....

Thanks!!

R

[ATM]

Yes

You can buy a future contract in GBP CAD or vice versa. They're normally quarterly so 3 months. You can then roll this over to the next quarter when it expires for a small fee. The date of expiry is fixed so you can't choose it. So if you buy the contract now or in 3 weeks the expiry date is still the same. It is not 3 months from when you buy it. Then as the fx values fluctuate your sale price fluctuates just like a share price. The cost to you is in the spread of buy and sell price. You'll need to deposit a chunk of money to cover your broker's risk appetite.

Make sense?

[RichS]

Yes, thank you. This is very clear.

So under a futures contract (is that the same as a forward contract?) do I ever actually have to buy or sell the underlying currency? I don’t want to do that. I don’t want to sell £x,000 of GBP or CAD$ equivalent and hold anything other than GBP. All the conversions get done for me and I end up with whatever I get in £. I just want to be paid out the difference between what I get in Sterling and what I would have got if Sterling hadn’t strengthened. I think you’re saying that’s possible?

Thanks a lot!

R

[ATM]

Yes

I might have the name wrong. Future or Forward but it's the same principle. You can execute all this in GBP. You need to be doing it via a spread bet which is tax free for UK people. You normally bet in GBP per point.

So if you want to secure yourself against fx fluctuations against a year's salary then lets assume you will earn GBP 100k net - for simpler maths as you probably earn a lot more if you're on PH.

This is all off the top of my head maths so feel free to adjust if it's wrong.

Current exchange rate is roughly 1.72 CAD per 1 GBP. If this were to change to 1.8 then you would get less GBP if you're changing from CAD to GBP. So you need your forward or future bet to increase in value as the rate changes from 1.72 towards 1.8 and in the exact amount that GBP 100k would convert to at the lower rate which is 1.72 in this example or 1.7200 showing 4 decimal places which spread bets usually do but you need to adjust if yours does not.

So now the math - which should be simple as it's just dealing with decimal places.

Today or at the start 100000 GBP = 172000 CAD.

If your spread bet is based on 4 decimal points you need to take 4 zeros off your 100000 to get 10.

So if you bet GBP 10 per point at 4 decimal places and the rate changes from 1.7200 to 1.8000 over the duration then your bet makes you a profit of 800 points at 10 which is 8000 GBP.

I think that's it. Now the PH maths gurus can rip it apart.

[ellroy]

OP you mention your banks FX desk, these guys should know all about this, ours certainly did, and I’d imagine they’d also be well aware of the share ops piece so may well have an off the shelf ready to go solution for you.

Can’t imagine you’ll be the first asking them about it.

[Derek Chevalier]

RichS said:

I’m currently living out of the UK. However I want to de-risk myself to FX movements. I am working for a Canadian bank.

In January I will receive £x,000 as a bonus. It will be converted by my employer into Restricted Share Units in my Canadian employer. So my £x,000 will buy GBP£/CAD$ exchange rate worth of Share Units at the then share price.

The Units will then go up or down depending on the fortunes of my company. I am ok with that share volatility and in fact I don’t think I am allowed to hedge against it.

Then in 12 months the “shares” are effectively sold and convert back to CAD$ which then gets sold for £GBP at the then prevailing CAD$/£GBP market rate.

How do I derisk the FX if for example we have a barnstorming Brexit and £GBP strengthens massively against CAD$ over the next 12 months? Basically I want a contract to pay me out the difference if £x,000 is worth less CAD$ in a year’s time that it is on day 1. What is that called and where can I get it easily? Is such an instrument available even to Joe Public? I could try our own FX trading desk I suppose....

Thanks!!

R

Rich, not an answer to your questions but I'm assuming the RSU's will be an annual award. Is there a reason you want to hedge just this year or are you planning on doing the same annually going forward?

[RichS]

Thanks for the help, all.

Our FX desk only executed Spot, annoyingly, though I might speak to one of the private wealth people in the New Year who might be able to help.

Failing this, I've had a play with the CMC demo platform and it seems fairly easy. Like you say, basically I want to go long on GBP/CAD to hedge x,000 of CAD against the CAD weakening against sterling. it seems that I can leave it open as long as I like (provided I can keep supplying margin) so that's fine.

You are right, it is something which will be recurring, so I will probably want to do it each year at more-or-less the spot price when the options are granted. I can just hold an aggregate equal to my total unvested about of RSUs and then sell the right number down.

Not worked out the CMC order ticket though yet- it seems that you just input the amount in GBP you want to buy of that pair- I assume that's just the x,000 of GBP?

Thanks!

[ATM]

If there was a question there I had trouble spotting it?

[RichS]

I was just generally musing, sorry. I suppose my two questions are:

1. You seem to talk about CFDs and spread-bets as though they’re the same thing. Are they? From my albeit limited reading, they’re not.

2. How much do I need to trade on CMC’s spread-bet site fully to hedge say £10,000. Is it £10,000? I can’t see anywhere where they state the pip value which would necessitate the “amount per pip” stake calculation you talk through.

Thanks,

Richard

[ATM]

RichS said:

1. You seem to talk about CFDs and spread-bets as though they’re the same thing. Are they? From my albeit limited reading, they’re not.

They're not. Although you can basically execute one or the other in a very similar way. The main difference is one is tax free and one is not.

RichS said:

2. How much do I need to trade on CMC’s spread-bet site fully to hedge say £10,000. Is it £10,000? I can’t see anywhere where they state the pip value which would necessitate the “amount per pip” stake calculation you talk through.

I've no knowledge of CMC.
Is it 10000 - no idea.
You could ask then how much you'd need to deposit.
In my suggestion above I said 10 GBP per point to hedge 100k GBP or 162k CAD. I'd guess you would need to deposit about 5000 or 6000 GBP for that.

[sas62]

To fully hedge FX exposure you need to know what the future currency amount is.

You know how many shares you will receive but not the future vesting price or CAD rate.

If you want a proper hedge you could short you employers shares also. Good luck getting that past compliance.

[ATM]

sas62 said:

To fully hedge FX exposure you need to know what the future currency amount is.

No you don't.