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View Full Version : Hedging USD exposure as a Japanese investor

NotMitch
09-20-2005, 12:25 AM
So if I was in a Yen denominated fund that held a USD investemnt and I was using forward contracts to hedge my expouse to the US Dollar would I be able to do it perfectly or would I see some slippage? Ignore transaction costs, the difference in the risk free rate of the US and Japan is what I think might slip, I think its built into the forward pricing but Im not sure.
Sniper
09-20-2005, 12:00 PM
Assuming I understood what you were asking...

You would need to periodically review the size of your hedge to ensure that it maintained parity with the intrinsic value of the underlying asset you are trying to protect against currency fluctuations.
NotMitch
09-20-2005, 01:16 PM
[ QUOTE ]
Assuming I understood what you were asking...

You would need to periodically review the size of your hedge to ensure that it maintained parity with the intrinsic value of the underlying asset you are trying to protect against currency fluctuations.

[/ QUOTE ]

Yes I get that. I just mean I have heard that even if you are hedging the right amount you will see slippage due to the pricing of forward contracts, and this is somehow reatled to the difference in interest rates.
Sniper
09-21-2005, 12:25 AM
Any hedge transaction has associated costs... Commission (generally not applicable to FOREX) and the cost of the bid-ask spread.
09-22-2005, 09:26 PM
I have specifically dealt with hedging of this kind. From what I recall, the only slippage is the transaction cost. In the case of a fx fwd, there is no outright commission, but rather the desk providing the hedge would take their cut via the bid/ask spread. How competitive the points they offer you are dependent on your relationship with the desk(i.e. how good/big of a client you are).

To be honest though, this really isn't "that" big of a deal to a fund. These are nickels and dimes for them.
NotMitch
09-23-2005, 06:17 PM
[ QUOTE ]
I have specifically dealt with hedging of this kind. From what I recall, the only slippage is the transaction cost. In the case of a fx fwd, there is no outright commission, but rather the desk providing the hedge would take their cut via the bid/ask spread. How competitive the points they offer you are dependent on your relationship with the desk(i.e. how good/big of a client you are).

To be honest though, this really isn't "that" big of a deal to a fund. These are nickels and dimes for them.

[/ QUOTE ]

Yeah the T cost is minimal, but Im seeing 30 bps a month in sliipage which seems high.