I know a little bit but not much about trading FX.
I want to hedge the sale of a property .
I live in Australia and have a property in UK that is being sold for 500000.
At present the GBP/AUD is at say 1.80.
If I want to lock in the 500000 at 1.80.
I think one contract is worth 100000GBP ??
If I sold/ shorted 5 contracts today at 1.80 and placed a stop just above the 1.80 and the exchange rate dropped to 1.70 over the next few weeks/ months this would hedge my exposure on the 500000 ? Yes/ No ??
If the exchange went above the 1.80 and hit my stop that would be my risk but covered by the increased value of the 500000 property value Yes/No ??
In a broad sense you are covering your open risk but these kinds of set ups are not perfect hedges.
You don’t mention at which stage your house sale is at present but a sale is not a contracted agreement until you actually formally exchange contracts of sale. As I am sure you know, house sales in the UK can drag on a long while and, until contracts are exchanged, there is always the risk that a current prospective buyer can drop out of the transaction and leave you back at square one.
Depending on where your property is in the UK, £500,000 is not exceptionally high and suggests a typically very nice family property in a pleasant locality. That should therefore not be a prolonged problem in selling if the price is reasonable for that location. But it also suggests you will not be selling to a first time buyer and therefore there is chain below you which can fall apart at any time regardless of your own buyer’s intentions. This can lead to long delays or even an aborted sale.
My point here is that your hedge position may end up dragging on for much longer than you anticipate and the longer it takes the greater the risk that, in the meantime, exchange rates move against you and take out your stop level and subsequently drop back again to your original level or even lower.
You mention that you will place a stop “just above the 1.80 level”. You risk depends on how much “just above” actually is!
Also, if the rate does go above 1.80, your losses on your forex position are not necessarily entirely covered by the increased value of the £500,000 from the sale since the spread you get from the bank when you transfer the funds will not be so tight as your forex spreads and depends on the rate and time when the bank completes the transaction. But maybe that is not such a big issue - just a form of slippage I guess one could say?
It is worth remembering that you will have to maintain or add sufficient funds to your account to cover both the initial margin on your positions and any current losses on the positions. Your account is “marked to market” on a real-time basis and if there are insufficient funds there should/while the positions go against you then the positions will be automatically closed out.
Of course, if you are still negotiating with buyers then the sale price may still decrease. Also, you may be liable to capital gains tax on the sale which might affect your net funds for conversion? In which case, you could maybe consider opening the same overall size position but in more mini lots instead of 5 standard lots. This would enable you to trim your position more precisely, if necessary, as time passes by closing out some of the total position, should the overall situation change.
Thanks for the info, food for thought.
The property has only just put on the market.
My just above stop may be 1.5% away from my opening short.
Once / if the trade gets going lower then I would move my stop down as the trade gos down, hopefully to the entry price so the trade risk is minimal.
Some opinions I have had are that the GBP will probably go lower over the next few months, that is why Iam considering hedging.
I have looked at forward contracts but they have a risk and cost.
So you only have a theoretical value at present until a firm buyer turns up. If your property is in Scotland then (if I remember rightly) the deal is secured once an offer is accepted, but in England this is not so until actual exchange of contracts. If you feel at all unsure about the value at £500,000 at the moment then you could maybe consider only partially hedging at this stage to reduce your exposure?
That is certainly worth doing, but be careful not to reduce stops too soon and too close because the GBP market is particularly prone to significant spikes due to Brexit negotiations and uncertainties regarding the ex-EU economic prospects, etc. You could be stopped out and back to the previous level before you finish even lunch!
[quote=“RoyG, post:4, topic:148217”]
Some opinions I have had are that the GBP will probably go lower over the next few months, that is why Iam considering hedging. [/quote]
You are considering hedging for the right reasons in that you have a tangible asset with a value measured in a foreign currency. One could argue that such a hedge situation should not have any stops at all, but I think you are certainly prudent in doing so considering the forex position and the (presently unsold) property asset are two quite different scenarios.
There are indeed foreseen vulnerabilities affecting the value of GBP and that is a relevant basis to consider hedging. But this situation could turn very suddenly and speculative forex markets can/ will react very soon. One could typically say that “my view this morning is that the pound will weaken significantly in the long term - but ask me again this afternoon…” - such is the long-term validity of forex commentary!!! Not very helpful, I know!
It is also worth remembering that exchange rates are affected by factors from both currencies involved. Factors specifically driving the UK currency will most probably also reflect against the AUD. But if the GBP is weakening against, say, the USD due to USD strength then this will not reflect so much in your GBPAUD rate risk. I only say this because most commentary about the GBP is based on the commonly traded GBPUSD and not specifically about your cross risk.