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Originally Posted by vankatav2003
Hello traders,
I have been thinking from a long time how to use hedging to protect existing cash i have and i have come with the following idea which i believe is very good because there is almost no way you can lose any money using this strategy
Lets say you have $1.28m USD now which is equal to 1M EUR and you dont care if after 1 year you will have 1M EUR or 1.28M USD , in that case i have a hedge idea that its guaranteed you cannot lose money but you can only make money.
If you have 1.28M USD now in your bank and if you dont trade it , it will make at most 4-5% per year.
But if you believe the EUR/USD is going up you go ahead and you buy 1M units EUR/USD at 1.28 (you have $1.28m in your bank so you dont need any leverage for that)
If the EUR/USD goes up lets say 100 points you have just made $10 000 on this trade, you close the trade and you have 1.29M USD now.
IF the trade goes in the opposite way and you lose lets say 500 points, then you will have 1.28m - 0.05M = $1.23M
But then you will still have 1M EUR which at that time will cost 1.23
So if you have 52 trades per year and you make even 52 losing trades you can lose 1-2 pips spread per trade whcih is close to nothing and no matter what happens at the end of the 1 year you will always have 1M euro.. thats the worst case Scenario OR you will have more than 1.28M USD.
Lets say you make 30 profitable trades and you aim 70 points per trade thats 2100 points in 1 year , which in addition to the 4-5% from the bank will make total of 25%+ on the account.
Let me know what you think about this one, but i think it will work only if you have the cash and you dont use margin, i think if you use big margin the big daily rates will eat the profit no matter how big it is.
Reagrds,
Ivan
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I'm not sure whether you're proposing to buy your 1M Eur in the spot market or the forward market, but either way it's ludicrous to suggest it's a no risk trade. If you buy now (i.e. in the spot market), you won't have those dollars in your account any more (and so you won't have the interest on them).
If you do it in the forward market instead, you will find that there is an exchange rate adjustment based on the interest rate differential between the two currencies you are trading.
But leaving all that aside, how can you possibly be so niave to assume that in a product as simple as FX there's this magical risk free pot of money out there that no-one else has spotted.
Lunacy.
GJ