Author Topic: Hedging through Interactive Brokers  (Read 8246 times)

0 Members and 2 Guests are viewing this topic.

Offline Tito

  • Newbie
  • *
  • Posts: 24
Hedging through Interactive Brokers
« on: 26/04/2016, 02:58:15 PM »
Hi All,
I have an account with Interactive Brokers as that is the only platform eSuper allows for trading in the USA. Having only started it mid last year, I did not get the benefit of having much of a buffer on my portfolio value due to entering at a lower exchange rate. Besides, the outlook at the time was that the AUD would continue to weaken. How quickly things have changed.

I tried hedging my US$ portfolio through SAXO a few times last year, only to lose on the trade each time.

Saxo has a spread of 0.005 on entry and another 0.005 on exit with $9.90 per trade, which when applied to the hedge signals given by the AUDUSD in September, October and November last year the result was not favourable. Needless to say, I did not act on the hedge signal given on the 1st Feb this year fearing I would get the same result. The horse has now bolted seeing as the AUD has strengthend by about 8% since then, however, I would like to be able to act with confidence if the AUD weakens and provides a re-entry point, or on the next signal.

There was a post on the forum last year about currency risk where a member said hedging or trading forex is not allowed through Interactive Brokers. I know that IB does not have much of a spread, if anything at all when converting from AUD to USD, and that the fee would probably be a few dollars, so I would prefer to hedge through them if possible.

I just called IB and they said I can go long the AUD using futures. I don't know anything about futures, so I wanted to ask if anyone else is doing it through IB before I go through the process of learning how it works, only to find it's not allowed or is not possible.

Alternatively, if anyone is hedging their portfolio using any other instrument through IB, I would appreciate knowing what it is so I can look into it as well.

Thanks,
Tito



Offline Nick Rossetto

  • Full Member
  • ***
  • Posts: 164
Re: Hedging through Interactive Brokers
« Reply #1 on: 26/04/2016, 04:29:27 PM »
Hi Tito

I would be interested in an answer too as I use IB for my SMSF although I thought ESuper did not offer IB as a platform (only eTrade, CommSec) so I use Superfriend to handle my SMSF tax return / audit. I was led to believe from IB that no FX trades were available to Australian clients (I still have an open short position on AUD from 87 last year when I moved into USD to trade the ETFs - needless to say it is less profitable than it was..) so was planning to open a SAXO account solely for the purpose of the hedge. I really don't want another broker to deal with though.

Offline Phil P

  • Jr. Member
  • **
  • Posts: 28
Re: Hedging through Interactive Brokers
« Reply #2 on: 27/04/2016, 01:35:20 PM »

I have an account with Interactive Brokers as that is the only platform eSuper allows for trading in the USA.

Hi Tito,

Is it esuperfund you are using? I use them and have a USD account with Saxo to trade SPA3 ETF. Once the fund is established with esuperfund you can change brokers to any of the following.

CMC Markets (CFDs Only)
Saxo Capital Markets
Interactive Brokers
CommSec Options
CommSec Warrants
EBROKING Options
EBROKING Warrants

While we are at it, can anyone remember which eUGM Gary gave a presentation about Hedging? It was last year sometime but I can't seem to find which one it was. Also, what do people use to track their Hedge trades. Do you do it in Trademaster?

Regards

Phil

Offline Tito

  • Newbie
  • *
  • Posts: 24
Re: Hedging through Interactive Brokers
« Reply #3 on: 27/04/2016, 02:30:12 PM »
Hi Phil

Yes, it is esuperfund that I am with. Apologies Nick for the confusion. I see there is another fund provided by AMP called esuper which I was not aware of.

The other reason I prefer IB to Saxo for my USA portfolio is that once your funds are converted from AUD to USD, they remain in USD. With Saxo, each of my ETF transactions were converted from AUD to USD when entered, and from USD back to AUD on exit. I have a long term outlook with my portfolio and would prefer to keep it in USD until the time comes when I want it back in AUD, at which point it can be converted back.

With CMC Markets, I think they have even worse spreads than SAXO, charge data fees as long as you have open positions, and you can't do stocks and CFD's out of the same account. I am not sure about Ebroking, but Commsec also has very high transaction costs per trade.

I really think that IB is the best way to trade SPA3 for those on eSuperfund. It would be great though to hear from others who have experience hedging through them.

Regards
Tito

Offline Terry

  • Jr. Member
  • **
  • Posts: 49
Re: Hedging through Interactive Brokers
« Reply #4 on: 27/04/2016, 02:46:49 PM »
Hi Phil,

I also trading through IB and have be interested in doing this as well. There doesn't currently exist any functionality to manage/track a hedge in TradeMaster which is a bummer. Can anyone from SWS confirm whether this is being developed?

In terms of how the hedge process works and how SWS place their one in Saxo, here are the details I got from them previously:

  Hi Terry,

  Our hedging strategy is following the signals which appear on the AUDUSD Forex Spot chart.

  We still use a CFD for the Futures contract to the currency to place the hedge.

  https://youtu.be/d5A_bjtgFao?t=1h6m15s

  How to place the hedge is shown a few seconds into the video I have linked. It should take you to the 1 hour 6 minute mark.


IB do have a Futures instrument for AUDUSD but I am not sure if it is the same as the one in Saxo and don't know enough about Futures to understand what (if any) the difference is. Can anyone from SWS assist with how to place this hedge in IB?

Thanks, Terry.



Offline Terry

  • Jr. Member
  • **
  • Posts: 49
Re: Hedging through Interactive Brokers
« Reply #5 on: 03/05/2016, 09:49:52 AM »
Hi,

Wondering whether anyone from SWS has read this post and is able to post a response?

Thanks, Terry.

Offline Campbell Sinclair

  • Support & Administration
  • Administrator
  • *****
  • Posts: 228
Re: Hedging through Interactive Brokers
« Reply #6 on: 11/05/2016, 09:30:53 AM »
Hi all,

We cannot really help with the IB discussion as we are not experts in the area of their platform and offerings. For discussing the instruments they have available to trade for Forex we would suggest contacting them directly for a discussion.

Hedge trades will be able to be tracked in the future with the new portfolio manager product that is being developed but this will come out in a longer time frame.

Kind Regards,

Campbell Sinclair

Offline Tito

  • Newbie
  • *
  • Posts: 24
Re: Hedging through Interactive Brokers
« Reply #7 on: 02/06/2016, 06:38:49 PM »
Hi All
With the AUD starting to strengthen again, I have looked further into how I can hedge my portfolio through IB and am happy to share my findings and limited understanding so far.

Firstly, I opened a paper trading account through IB which was very easy to do. When you click to open TWS you have a choice between choosing to do “live trading” or “paper trading” under Trading Mode. If you click on paper trading, you can easily set up your paper trading account. Once it’s set up, you are given $1,000,000 of paper money to trade with.

To enter the hedge transaction (ie, to go long AUD), I entered AUD into the order entry window pressed enter and selected “Futures”. A window pops up giving the selection of various contracts for AUD@GLOBEX, namely:

AUDJun    0.7220
AUDSept   0.7192
AUDDec    0.7200
AUD~JUN 0.7220

The multiplier for whichever contract chosen is 1pt = $100,000.

The actual AUDUSD exchange rate when the window popped down was 0.7221, so the contracts closest to actual are the AUDJun, or AUD~JUN which seems to be continuous. I selected the AUD~JUN and clicked on the BUY button.

You then need to choose how many positions you want. 1 position is for 1 x A$100,000, 2 positions would be for 2 x A$100,000, etc. So assuming my NASDAQ portfolio is worth US$80,000, I would only take out 1 position.

Once the contract has been entered into, say at 0.7220, you have purchased 1 x A$100,000 x AUD/USD 0.7220 = US$72,220. The cost for this transaction was US$2.46.

If the AUDUSD rate were to move to 0.7400, your portfolio would be worth 1 x A$100,000 x 0.7400 = US$74,000. Your contract was purchased for US$72,220, so you have US$74,000 – US$72,220 = US$1,780 surplus (excluding the transaction costs).

I spoke to IB and they said that apart from the transaction cost of US$2.46 when you enter the contract, and a similar amount when you exit, there are no further fees. As my portfolio is not geared, there is a margin that gets used when entering this trade which was around US$2,655. This I understand to be a hold on my funds to that amount to cover IB should this transaction turn into a loss, they have the funds secured. This will fluctuate, ie, become more if the AUD weakens and become less if it strengthens.

I hope my understanding of this instrument and the way it works is correct. If anyone sees any inaccuracies in the above, please let me know.
« Last Edit: 07/06/2016, 01:26:35 PM by Tito »

Offline Johnathan Habersberger

  • Newbie
  • *
  • Posts: 16
Re: Hedging through Interactive Brokers
« Reply #8 on: 02/06/2016, 10:21:15 PM »
Hi Tito,

I have been trading futures for the past decade so will try to help here. Your understanding is correct. Note that the contract has a delivery date, which means for non-physical futures (such as currency rates) you will be exited automatically as I am almost certain IB won't let you be delivered on, but I would check to make sure that all contracts are exited before delivery. Many brokers will not trading (as against hedging) customers take delivery. In this fashion it is like an option. Losses will be automatically deducted from your account on an exit so make sure you have enough free cash if your margin won't cover it, they might let you do this if there is sufficient assets in the stock sector. IB are quite flexible like this which is nice.

In this situation you identified I would take the Dec contract, less work for similar price. The Jun contract expires in a few weeks. Otherwise you are spot on. Indeed that is quite a favourable structure (usually back months are more expensive due to carrying costs). I hope this has been helpful, let me know if anything else needs clarifying,

Cheers,

Jonathon

Offline Tito

  • Newbie
  • *
  • Posts: 24
Re: Hedging through Interactive Brokers
« Reply #9 on: 06/06/2016, 07:05:03 PM »
Hi Johnathan

Thank you very much for your reply and information provided.

I have checked with IB, and you are correct, the contact would be automatically exited on delivery date if I donít close out before then.

I also asked about the difference between the AUD June contract and the AUD June Continuous contract. They have the same expiry date with the only difference being there is much more historical data available for the continuous contract as opposed to the June contract, so you are correct in saying it best to go for the Dec contract rather than the June contract which is about to expire.

Looking at the chart on TWS for the AUD Dec contract, the volumes look very thin by comparison to the June contract. I would imagine as you get closer to the expiry date, the volumes will start to increase. The only concern being for example, if I were to enter the Dec contract now and want to exit it say in July (still a long way from Dec), would it be easy to sell (ie, get a buyer) considering the lower volumes?

Looking at the AUDUSD chart on Beyond Charts, it looks about to give an entry (hedge) signal. A concern which possibly Gary could answer is whether it would be wise to hedge now considering the Brexit referendum. From what I gather this is an event which could have an impact on the AUDUSD exchange rate. If we do get a hedge signal, do we follow the signal or should we wait until after the 23rd June?

Regards
Tito

Offline Johnathan Habersberger

  • Newbie
  • *
  • Posts: 16
Re: Hedging through Interactive Brokers
« Reply #10 on: 07/06/2016, 12:36:13 PM »
OK Tito, we are getting there.

The continuous contract refers to charting which knits together each expiry month for historical data. I won't go into the details but this is a very contentious area for system designers. It will automatically roll the chart, but you don't trade per se off the continuous contract.

On the IMM distant months volumes can get a bit thin (the difference between hedgers and speculators) but at your indicative volumes you will always get a fair fill, particularly at low interest rates (this will always be arbitraged by someones algorithm).  It is therefore easiest to trade the more distant contract.

So, if I was you I believe you want sell $US/buy $AU (ensure the trade is right way!!). I would just buy 1 Dec Au contract and you are done for the rest of the year.

I would not worry about Brexit or anything else. In this setting we are system traders, not event driven macro funds. We, or certainly I, can't analyse and take a position in these events. It is a highly specialised and profitable field, George Soros and Stan Druckenmiller were the masters at this type of thing and they do not advertise which side of trades they are on! I am pretty sure Gary would advise put the hedge on now, roll it in December and go from there.

Hope this helps, good luck

Offline Tito

  • Newbie
  • *
  • Posts: 24
Re: Hedging through Interactive Brokers
« Reply #11 on: 07/06/2016, 01:43:33 PM »
Hi Johnathan

Thanks for your timely reply! I see the signal has been given to hedge the AUD vs the USD.

I have done the trade and am long at 0.7346.

Thank you very much for your assistance and input  :thumb:.

Regards
Tito

Offline Gary Stone

  • Administrator
  • *****
  • Posts: 964
  • "Anything can happen."
Re: Hedging through Interactive Brokers
« Reply #12 on: 08/06/2016, 09:54:01 AM »
Tito,

As Johnathan said, we are system investors/traders. Research of historical data has all sorts of events built into it. Sure different and even unique events.

Brexit right now is a known upcoming event. What is unknown is which way it will go. But there are also other major (and not so major) variables that also impact the AUDUSD (and every other market pricing). 

Which way the AUDUSD continues to move will be the net aggregate of the weighted effect of each and every one of those variables, in any given timeframe. Including Brexit.

Trying to predict the weighting of a single variable and its effect against the aggregate of all other variables is a tough, some might say impossible, gig (unless you have some insider info). Not knowing, and hence being uncertain, is risk.

That's price action in financial markets summed up.

Regards
Gary
On the journey

Offline Nick Rossetto

  • Full Member
  • ***
  • Posts: 164
Re: Hedging through Interactive Brokers
« Reply #13 on: 13/07/2016, 08:51:08 PM »
Hi Johnathan

Many thanks for your input on this thread. I am able to use the Futures feature (GLOBEX) through my Interactive Brokers Cash Account in the name of our SMSF as well.

My scenario is last year I SOLD AUD140,000 at 87 to get some USD to trade the US listed ETFs and ETF Stocks.

Gary mentioned not using the spot because of funding costs and to use SAXO CFDs. This would mean having an additional broker.

Are you able to explain the difference? Why is there 'no carry cost' to pay if I take out 1 contract ($AUD100,000 if I am correct) through the futures vs a 'carry cost' in the spot market.

The only disadvantage I can see with futures is the fixed contract size and I will either have to 'under hedge' at $100k or 'over hedge' at $200k. Have I got this right?


Regards

Nick

Offline Johnathan Habersberger

  • Newbie
  • *
  • Posts: 16
Re: Hedging through Interactive Brokers
« Reply #14 on: 13/07/2016, 10:30:47 PM »
Hi Nick, I will endeavour to help as best I can here again.

I am not 100% sure about the CFD's, but there is no "free" carry around. Saxo will charge/pay interest if I remember correctly at about LIBOR +/- 2% although this may have changed, depending whether you are long/short. I can't remember which way round it is, but I always operate on the principle there is no free money/carry out there, especially from CFD's which are not exchange traded products.

The carry in futures contracts is built into the price structure, ie the spread between short dated and long dated months. The far contracts are usually more expensive than near ones due to the cost of carry. Occasionally this price structure changes and can be a useful trading signal if one knows how to exploit it, but I digress.

The big disadvantage you note is the fixed contract size and that is the main limitation, but the IMM/Globex is exchange traded and not OTC. Therefore much safer in my opinion,

Hope this helps,

Cheers,

Jonathon