How much exchange rate risk ?

System

Deleted_User wrote: »

Not really. Say USD drops by half. Does it mean Apple shares lose half of the value? Not at all. They sell products all over the world. Even if the “value” of sales goes down in the states (although it will be corrected by inflation), total sales won’t go down all that much. And their US Labour costs and the cost of certain supplies will go down too sometimes profit margin might actually increase in real terms. Bonds would be a different matter.

It’s a hypothetical example but the real value of shares holds up very well during periods of high inflation

The OP is concerned about Sterling exchange risk with Brexit rather than US Dollar exchange risk. If Sterling appreciates/depreciates against all other currencies then that will not have a large effect on the competitiveness of Apple.

beamyup

Thanks Economic, that's what I thought (how could it be different! )

So - to Mordco's point - which i think is critical - is Hedging (against currency changes) "speculative" and the same as trying to "beat the market"? (which I am against as I am a committed low cost global tracking investor ).

I'm not sure that it is the same. I want to invest in shares - not gamble on exchange rates.

I'm really not sure.

What do you all think?

[Deleted User]

Economic wrote: »

The OP is concerned about Sterling exchange risk with Brexit rather than US Dollar exchange risk. If Sterling appreciates/depreciates against all other currencies then that will not have a large effect on the competitiveness of Apple.

True, and his “wealth” expressed in sterling will change but not the real intrinsic value of Apple stock. In any case, hedging in anticipation of specific events is speculation and will likely result in underperformance

beamyup

I am thinking - which would i rather have - which has the highest value to me

£100 - 1% =£99 (charge for hedging)
or
£100 +/- 20% (equal chance of either £80 or £120)

My feeling is that I should avoid the costs, so go for the gamble.

zagfles

Other thing to bear in mind is if you intend to do a lot of travelling in retirement, you are already "hedged" to some extent, as a good proportion of your spending will end up being in foreign currencies.

AnotherJoe

beamyup wrote: »

I am thinking - which would i rather have - which has the highest value to me
£100 - 1% =£99 (charge for hedging)
or
£100 +/- 20% (equal chance of either £80 or £120)
My feeling is that I should avoid the costs, so go for the gamble.

Ignoring investment gains or losses but looking at the long term ...

Year one lose a pound, £100 investment up to £120 but worth worth £119 due to £1 charge*
Year two lose a pound investment worth £99
Year three lose a pound investment worth £79
Year four lose a pound, investment worth £97
Year five lose a pound investment worth £116
Year six lose a pound investment worth £75
.....
Year forty lose a pound investment worth £60


Sum total, you lost 40% of your investment. Had you not hedged it would be worth the original £100 (plus gains/losses)
Also, AIUI hedging does not guarantee you dont suffer a loss, it aims to minimise the loss (or gain, dont forget that, you are also paying to lessen a gain :eek: )but its not open ended your £1 fee in this case wont cover you should (say) tehe £1 fall to 10c.


* just to make the maths simple.

jamesd

beamyup wrote: »

jamesd : can you give me an example of a hedged global tracker?

SL Vanguard FTSE Developed World Hedged Pension Fund is the one I'm using at the moment. It's an SL wrapper around Vanguard FTSE Developed World Common Contractual Fund, GBP hedged units. At 0.278% annual cost to me including pension wrapper costs. Assorted hedged ETFs are around and in another wrapper I've used them. One is IGWD iShares MSCI World GBP Hedged UCITS ETF.

beamyup wrote: »

If GBP/USD changes by e.g. 20% does that correspond to a 20% change in the GBP value of the US part of my investment, all other things remaining equal?

Right idea. Say it's $1.20 per £, that changes to 1.45 which is a reasonable average rate and you started with £100 worth. The company values haven't changed but your £100 is now worth 100 * 120 / 140 = £85.71. And you're down 14.29% as a result.

Hedging is fairly cheap and worthwhile for moderate durations to protect against that.

Of course a no deal exit could cut the rate to parity and you'd lose the gain in GBP terms in that case, for a while. It's part of why I'm not fully hedged.

Nothing huge has happened to the value of the UK economy but expecting reversion to the exchange rate mean at some point is reasonable. And hedging at values that aren't moderately close to the edges of the normal range is much less likely to be useful.

Individual context also matters. Someone in drawdown who may be selling to provide income is more exposed to the sequence of returns risk of currency moves than someone far from retiring and adding money.

[Deleted User]

1. Assumption of an orderly Brexit has been baked into the current exchange rate, so the risk is to the other other side.

2. If the pound suddenly jumps vs all other currencies, there will be a whole lot of other things happening like drop in the cost of living when expressed in sterling and the effects on those in drawdown will be short term. The portion one needs over the next couple of years shouldn’t be in stocks anyway.

jamesd

The exchange rate is too low for me to think that all of the exit with decent deal and decent trade agreements is in it.

Next couple of years not in equities is fine but the Pound is low enough tat a return to current levels could take a lot longer than that. Would be a different story if it was around the middle of the range now.

[Deleted User]

Alright, let’s get back to this in October