Strategi Hedging Anak TK by Dragon FX

27/04/2008 23:28

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Forex Hedge Strategy

Submitted By Sumant Yerramilly


The Forex market has become extremely popular in recent times due to the "carry" trading benefits. Carry trading is a trade that is executed in a manner that helps one not only benefit from the appreciation of a certain pair but also accumulates interest over time. Every currency has a different interest rate backed by their central bank.


Central Bank Rates

NZD 8.00%
AUD 6.25%
GBP 5.75%
USD 5.25%
CAD 4.50%
EUR 4.00%

CHF 2.50%
JPY 0.50%


In terms of forex, a position accumulates or pays interest based on the interest rate differential of the pair. For instance, the approx. interest accumulated when buying the NZD/JPY pair would be 7.50%, 8.00% paid from Reserve Bank of New Zealand and 0.50% paid to the Bank of Japan. In other words, on a 1 standard lot the interest paid  out daily would be approx. $10.55. (FXCM) Consequently, 10.55x365=  $3850.75 earned a year on pure interest with the purchase of one  standard lot of the pair. Thus, a 7.5% return is an extremely high  yield paid out in any market, which gives Forex traders a nice advantage in comparison to other markets.

With this mind, I have developed an affective way to hedge Forex  positions while incurring the basic interest paid without a loss on the spot trade. Hedging in Forex or any market helps reduce risk,  while also reduces reward. Thus, this strategy is mainly for low risk traders, as the risk/reward ratio is fairly balanced.

The Strategy:

The Hedge:

These 4 pairs for this hedging technique that should ultimately result in us having almost a zero balance from spot trading and a high positive rollover. (Interest accumulated) The 4 pairs are  GBP/JPY (Cross), GBP/USD, USD/CHF, and CHF/JPY. GBP/JPY is a cross between USD/JPY and GBP/USD, due to this, GBP/JPY pays the highest roll while also being extreme volatile, as it has increased almost
500 pips in the last 6 months. Due to this reason, it is recommended  to keep margin levels in the account less than 2%. This will prevent  draw downs from closing open options due a possible margin call. To hedge the account from purchasing the GBP/JPY, we must sell 1 lot of
each of the pairs: GBP/USD, USD/CHF, and CHF/JPY. The interest accumulated per day for the following pairs per standard lot are listed below:

Pairs

Swap Rate

GBP/JPY(B)
$27.30

GBP/USD(S)
-$2.50

USD/CHF(S)
-$7.70

CHF/JPY(S)
-$3.90

Total Roll Per Day

$13.20


Buy and Sell

The ideology behind using the 3 other pairs used to counter GBP/JPY is their low swap rates and fairly moderate volatility with the exception of GBP/USD. Since GBP/JPY is a cross for every pip the
GBP/USD and USD/JPY pair moves, GBP/JPY moves 2. This results in the GBP/USD pairs being a perfect counter part to the other 3 pairs.


Mathematically, at the end of the day (5 pm EST), $13.20 should be credited to your account with the opening of one standard lot of each of the pairs. $13.20x365 is roughly $4818 per one standard lot per
year. $4818 accumulated per year on a 1% margin account starting at $4000, is nearly more than 100% on returns. With the ROI over a 100%, and risk in spot trading minimal due to hedging, this system is an ideal way to gain consistent returns on a day to day basis.


However, with every self proclaimed "great" system comes a draw down. The flaw in using this method to trade is the exposure of the US Dollar among the pairs. At the end of adding the financial capital
used for the pairs, the final result is approx. $100,000 extra US Dollars are exposed in the hedge system split $20,000 against CHF and $80,000 against JPY. But, with the dollar staying fairly steady across the board with these pairs, traders should be too alarmed by any major changes against the dollar.

Hedge Exposure Layout

GBP JPY USD CHF
2 -2 - -
-2 - 2 -
- - -1 1
- 1.2 - -1.2
-0.8 1 -0.2

Final Hybrid:Long USD/CHF (20%)

Final Hybrid:Long USD/JPY (80%)

I would highly recommend first opening a demo Forex account and back testing this strategy. Until you are confident about the hedging risks and leverage involved, I would not recommend using this technique on a live account. $13.20 per 100K standard lot per day with minimal technical analysis involved is an extremely high return for most types of traders.

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