Hedging US Dollar?
Discussion
I work for a US based multinational and their incentives are heavily orientated towards stock allocation. Things have been going well the last couple of years to the point I have been awarded a pretty reasonable future based allocation of shares that vest over the next 2-6 years.
I am looking to see what way I can take some of the risk out if the USD rate change element of my "investment".
I don't forsee the dollar rate against the pound getting too much better than it is now so wanted to see if there was an "instrument" I could invest in that would benefit me if the dollar weakens (and offset the loss I make on my shares)?
Hope that all makes sense ... I think I need some proper advice but don't even know where to start as I assume this is quite specialised and not something my local bank is going to help with? Have started some internet research but am going in circles ...
Appreciate any help out there ...
I am looking to see what way I can take some of the risk out if the USD rate change element of my "investment".
I don't forsee the dollar rate against the pound getting too much better than it is now so wanted to see if there was an "instrument" I could invest in that would benefit me if the dollar weakens (and offset the loss I make on my shares)?
Hope that all makes sense ... I think I need some proper advice but don't even know where to start as I assume this is quite specialised and not something my local bank is going to help with? Have started some internet research but am going in circles ...
Appreciate any help out there ...
Simplistically you want a forward contract to buy GBP with USD, but if the timescale is several payments over 2-6 years and the amounts relatively modest it probably won't be worth it.
Your bank could help but their charges would be astonishing. You would really need to use a specialist Foreign Exchange broker.
Your bank could help but their charges would be astonishing. You would really need to use a specialist Foreign Exchange broker.
There are a number of ways to hedge fx exposure, some examples are:
spread betting account like IG INDEX.
Forward exchange contracts like http://internationalpayments.travelex.co.uk/transf...
You don't know how much the shares would be worth in USD when you come to sell them so you run the risk you won't actually get the USD amount you have bet on. To remove this risk you would need to hedge the share price too. The Brexit referendum could also have a significant impact on the USD rate. There are so many risks (margin payments, counterparty risk etc.) in this hedging strategy that you should probably just walk away now if you are not particularly financially savvy...
spread betting account like IG INDEX.
Forward exchange contracts like http://internationalpayments.travelex.co.uk/transf...
You don't know how much the shares would be worth in USD when you come to sell them so you run the risk you won't actually get the USD amount you have bet on. To remove this risk you would need to hedge the share price too. The Brexit referendum could also have a significant impact on the USD rate. There are so many risks (margin payments, counterparty risk etc.) in this hedging strategy that you should probably just walk away now if you are not particularly financially savvy...
You could buy a one lot Future in the British Pound, which is about $125,000 of exposure. As someone else has mentioned to hedge for this long will be expensive. You would have to roll this Future every three months and that in itself would probably cost 1% per year (minimum at a guess). I guess you could maybe do something through IG Index too, they may have a Dec16 contract you could use to hedge. Remember with these hedges if they go offside you have to come up with the margin too which adds to the cost for you.
Whatever you do, don't hedge with spread bets. They are a short term trading tool and the daily funding will cost you a fortune to hold over the kind of period you are looking at.
To hedge you are looking at holding long term positions and the key here is the spread differential between the two currencies. Ie is it a carry trade, are you going to essentially be paid to hold the hedge. With UK and US interest rates where they currently are then I don't think you can.
You could argue that as the US has begun the upward phase of its interest rate cycle then the differential will increase but the reality is that we always follow the US within 6/12 months. But with Brexit coming up I wouldn't be doing anything at all for some time.
But generally speaking, unless you are going to be paid to hold the hedge then I would look at what the gross potential impact of a significant currency disparity at the time your options mature would actually be and whether in reality it is worth fannying about hedging in the first instance?
For example are we talking a few, tend or hundreds of £thousand risk of loss to currency change? And from that figure what sort of percentage of your total wealth is it?
The larger the number the more viable it is to hedge same the bigger the percentage of your overall wealth.
To hedge you are looking at holding long term positions and the key here is the spread differential between the two currencies. Ie is it a carry trade, are you going to essentially be paid to hold the hedge. With UK and US interest rates where they currently are then I don't think you can.
You could argue that as the US has begun the upward phase of its interest rate cycle then the differential will increase but the reality is that we always follow the US within 6/12 months. But with Brexit coming up I wouldn't be doing anything at all for some time.
But generally speaking, unless you are going to be paid to hold the hedge then I would look at what the gross potential impact of a significant currency disparity at the time your options mature would actually be and whether in reality it is worth fannying about hedging in the first instance?
For example are we talking a few, tend or hundreds of £thousand risk of loss to currency change? And from that figure what sort of percentage of your total wealth is it?
The larger the number the more viable it is to hedge same the bigger the percentage of your overall wealth.
DonkeyApple said:
Whatever you do, don't hedge with spread bets. They are a short term trading tool and the daily funding will cost you a fortune to hold over the kind of period you are looking at.
Whilst this is fundamentally good advice, it is possible to use spread bets on Futures contracts which do not attract daily funding charges, but as somebody else mentioned you will incur the cost of the spread every time you roll over the contract, every 9 months or so.Turning the original question slightly on its head, if the share performance of the company is correlated to the S&P500 or another index, you can use a combination of Index Options to cost-effectively hedge against a fall in the value of the shares - in USD - and amend the deal size to take account of the value of the shares in GBP at the time that you open the position, to provide you with the protection that you require.
You need to fully understand the risks though so DYOR.
sideways sid said:
DonkeyApple said:
Whatever you do, don't hedge with spread bets. They are a short term trading tool and the daily funding will cost you a fortune to hold over the kind of period you are looking at.
Whilst this is fundamentally good advice, it is possible to use spread bets on Futures contracts which do not attract daily funding charges, but as somebody else mentioned you will incur the cost of the spread every time you roll over the contract, every 9 months or so.Turning the original question slightly on its head, if the share performance of the company is correlated to the S&P500 or another index, you can use a combination of Index Options to cost-effectively hedge against a fall in the value of the shares - in USD - and amend the deal size to take account of the value of the shares in GBP at the time that you open the position, to provide you with the protection that you require.
You need to fully understand the risks though so DYOR.
Spread bets are short term instruments and genuinely not suitable for long term positions. And if a client hasn't the financial capacity to access the efficient forms of long term market exposure then to be honest there really isn't a need to be hedging.
Besides, is the currency risk even the key component in the trade? It is after all, typically, a tiny fraction of the actual stock risk. And if the stock risk is tied to your employment risk then in reality the fx exposure is almost certainly unbelievably irrelevant in the first instance.
DA, I think we're saying the same thing; you a little more eloquently than me.
I didn't say originally, but would assume that the 1% or so spread every six months on a spread bet on a six-month FX future would be an acceptable cost for the OP to achieve his objective.
We have also both said that the greater risk probably lies with the underlying value of the shares, than with the sterling equivalent of a sum of USD.
I suggested the OP considers options as a tool to mitigate this. As I guess the OP's contract of employment may prohibit him from trading options on shares in his employer, I suggested using options on the Index if the company's shares are closely corellated to (or part of) the Index.
I didn't say originally, but would assume that the 1% or so spread every six months on a spread bet on a six-month FX future would be an acceptable cost for the OP to achieve his objective.
We have also both said that the greater risk probably lies with the underlying value of the shares, than with the sterling equivalent of a sum of USD.
I suggested the OP considers options as a tool to mitigate this. As I guess the OP's contract of employment may prohibit him from trading options on shares in his employer, I suggested using options on the Index if the company's shares are closely corellated to (or part of) the Index.
Don't forget the funding element of the future is not in the spread (that's our comm less any hedge cost) but the difference between the mid of the future and the corresponding cash quote, once you've taken into account any dividends due over the period if it's an equity index future.
I would think that as RSUs are an OTC that you wouldn't be able to get them into a wrapper like that. I also suspect that they will be non fungible and non transferable so you couldn't transfer them into trust.
I seem to recall that they are treated as 'income' when they vest in the US and the issuer pays the income tax before the physical stock is delivered to the beneficial owner.
The devil will be in the detail. But I would also be very careful as they are an all too common scam to get workers to work for well below market rate for one firm when the IP of what they are working on is owned by another, so the RSUs will never have any value.
I seem to recall that they are treated as 'income' when they vest in the US and the issuer pays the income tax before the physical stock is delivered to the beneficial owner.
The devil will be in the detail. But I would also be very careful as they are an all too common scam to get workers to work for well below market rate for one firm when the IP of what they are working on is owned by another, so the RSUs will never have any value.
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