# hedging against loonie rise?



## twowheeled (Jan 15, 2011)

I was hoping to get some advice about hedging my currency exposure. I know very little about currency hedging or how to plan for events like the huge gain in the loonie lately. I converted half my portfolio into USD earlier this year because I only have interest in holding US equities. Needless to say I'm getting hit hard. 

I have no interest in investing in the canadian markets. The other half of my portfolio is in a hedged all world ex Canada ETF. I'm wondering if there is a way to remain currency neutral on my USD holdings which are not long term. All my research is pointing me towards hedged ETF's which is not what I'm after. I don't want to be forced out of my positions because of currency fluctuation, I have set stops and rules which will force me to get out of USD. Does anyone have some advice on how to go about hedging? I am picturing something like a leveraged short on USD held in CAD but don't know what type of vehicle this would be. Am I getting in over my head?


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## OnlyMyOpinion (Sep 1, 2013)

Some US (and Int) exposure is necessary for proper diversification, but owning USD to the exclusion of any $CDN investments makes sense if you are American or live in the US, so that all your spending is USD. Otherwise I can't see any merit to your approach.


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## fatcat (Nov 11, 2009)

oil, gold and materials are traditional hedges against the usd
horizons has an etf: CAN which will rise as the loonie rises against the us dollar

but i confess i cannot make sense out if the reasoning behind your portfolio construction

why are you so averse to having money in canada dollars and / or canada equities if you live and work in canada ?


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## like_to_retire (Oct 9, 2016)

fatcat said:


> but i confess i cannot make sense out if the reasoning behind your portfolio construction
> 
> why are you so averse to having money in canada dollars and / or canada equities if you live and work in canada ?


ditto...............?

ltr


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## james4beach (Nov 15, 2012)

Since currencies are all relative, everything depends on your reference frame. Your reference currency could be USD, CAD, JPY, CHF, anything really.

Most of us pick our reference as the currency of the country we intend to live in, since most of our expenses will be in that currency. For example though I'm working south of the border, I intend to live in Canada long term, so my reference currency is CAD.

This might be the first question to consider.


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## twowheeled (Jan 15, 2011)

I'm not sure what my reasoning has to do with it. I invest in equities in the american exchange because information on them is readily available and I am heavy in certain sectors that I don't believe have the same strength or growth in Canada. For example, a lot of my portfolio is in Alibaba and Amazon, and I also have a lot of weight in chinese social media companies through ADR's. What advice would you give me? Should I only look at equities that trade on Canadian markets because I live here? 

I am not adverse to having Canadian dollars, but my portfolio is not my chequing account and I do not require the same liquidity. I'm investing in where I believe the growth will be, I want to protect against the downside. I would ask you the same question, why do you invest in the canadian markets? Patriotism? Convenience?


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## fatcat (Nov 11, 2009)

twowheeled said:


> I'm not sure what my reasoning has to do with it. I invest in equities in the american exchange because information on them is readily available and I am heavy in certain sectors that I don't believe have the same strength or growth in Canada. For example, a lot of my portfolio is in Alibaba and Amazon, and I also have a lot of weight in chinese social media companies through ADR's. What advice would you give me? Should I only look at equities that trade on Canadian markets because I live here?
> 
> I am not adverse to having Canadian dollars, but my portfolio is not my chequing account and I do not require the same liquidity. I'm investing in where I believe the growth will be, I want to protect against the downside. I would ask you the same question, why do you invest in the canadian markets? Patriotism? Convenience?


with respect, it makes no sense at all to not have a portion of your investments in the country you live in ... 

there is dividend tax credit (not too important based on your holdings) but more important, a rising loonie is generally going to indicate a strengthening business and investment environment in which case you are hedging against the us dollar by holding canadian companies that will do well and grow in a strong canadian economy

this is the best of all ways to hedge against a rising loonie vs. the us dollar

ps. obviously, if you weren't bringing your money into canada, this wouldn't be necessary but the loonie is the currency you live in


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## like_to_retire (Oct 9, 2016)

twowheeled said:


> I would ask you the same question, why do you invest in the canadian markets? Patriotism? Convenience?


Since my stocks are Canadian dividend paying, I find the dividend tax credit is quite an advantage that stocks from foreign countries can't match.

All my assets and liabilities are in Canadian dollars.

Many of my Canadian stocks are multinational.

And as you correctly pointed out, _"I know very little about currency hedging or how to plan for events like the huge gain in the loonie lately"._

I'm also very patriotic.:friendly_wink:

ltr


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## humble_pie (Jun 7, 2009)

a well-known hedge with leverage is FXC, the canadian dollar ETF. It's a US domiciled fund.

FXC has options which deliver the leverage. They are very expensive to buy. For example, FXC closed friday at 79.30 (it tracks CAD, therefore has been rising since may) while march 80 calls are 1.55-1.80.

how much in FXC options would one need to be fully hedged? one option contract = $7930, so as of friday one would have divided portf's market value by 7930.

suppose one's portf were an even $100k. That works out to 12.61 contracts. We could say that 12 calls would pretty much cut the hedge biscuit. At 1.80/sh or $180/contract, those 12 march 80 calls will cost USD $2,160. 

ouch. Even then, one is only hedged for 8 months. In march/18 one has to repeat. At an annual cost of $3k to 4k per portfolio 100k, this hedge means that a US portfolio has to return better than 3-4% to break even.

but - given that canadian securities can return 3-4% - this also means that a hedged US portfolio has to return better than 6-8% before it can even be said to keep up with its domestic canadian counterpart.

a hedge such as the above-mentioned is way too expensive imho. A better way to hedge, as folks in this thread have been pointing out, would have been to have split the portf initially between canadian & US holdings.

.


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## twowheeled (Jan 15, 2011)

fatcat said:


> with respect, it makes no sense at all to not have a portion of your investments in the country you live in ...
> 
> there is dividend tax credit (not too important based on your holdings) but more important, a rising loonie is generally going to indicate a strengthening business and investment environment in which case you are hedging against the us dollar by holding canadian companies that will do well and grow in a strong canadian economy
> 
> ...


that's a good point that I never considered because I typically do not invest in dividend paying stocks, and half the portfolio is in a TFSA anyway. I am (or was) bearish on the Canadian economy. Who could have guessed the recent GDP growth or rate hike. Right now I have no opinion on it, I just don't want exposure to the currency volatility. I don't want to invest in Canadian markets because I don't want to follow them and be up to date on the macro situation in Canada. 
I am very lucky that my portfolio is still at par despite the loonie. I was just hoping there would be a cheap way to hedge. The option doesn't sound like it.


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## james4beach (Nov 15, 2012)

Do you have any fixed income or savings accounts? Or is your entire net worth in US stocks?


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## fatcat (Nov 11, 2009)

twowheeled said:


> that's a good point that I never considered because I typically do not invest in dividend paying stocks, and half the portfolio is in a TFSA anyway. I am (or was) bearish on the Canadian economy. Who could have guessed the recent GDP growth or rate hike. *Right now I have no opinion on it, I just don't want exposure to the currency volatility.* I don't want to invest in Canadian markets because I don't want to follow them and be up to date on the macro situation in Canada.
> I am very lucky that my portfolio is still at par despite the loonie. I was just hoping there would be a cheap way to hedge. The option doesn't sound like it.


 by definition, you are inviting and installing currency volatility by putting all of your money outside the country you live work and spend in ...


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## OnlyMyOpinion (Sep 1, 2013)

Ok I see, your strategy is truly international, looking for growth - not income or Cdn dividend focussed. Your investments are primarily x-Canada.
Given that, you shouldn't be worried about getting hit hard recently by the rise in the $Cdn. Exchange will go up & down short term but likely trend back to the rate you bought at (or in any event can't be predicted over a long term). So you shouldn't care about the exchange rate and you probably should be tracking in USD.


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## OnlyMyOpinion (Sep 1, 2013)

Ok I see, your strategy is truly international, looking for growth - not income or Cdn dividend focussed. Your investments are primarily x-Canada.
Given that, you shouldn't be worried about getting hit hard recently by the rise in the $Cdn. Exchange will go up & down short term but likely trend back to the rate you bought at (or in any event can't be predicted over a long term). So you shouldn't care about the exchange rate. 
You should be tracking in USD and hedging is not required.


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## Blaketrades (Aug 4, 2017)

*Hedging Loonie*

Hi There,

More than happy to discuss, I am FX Trader and Specialize in Hedging.

gotta get around the no email thing on here but decode this for my work email

Bl taylor AT CambridgeFX dot Com

Bltaylor
AT
cambridgeFX
DOT
Com


I can send you lots of attachments and presentations to help.

Best Regards,

Blake


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## humble_pie (Jun 7, 2009)

Blaketrades said:


> Hi There,
> 
> More than happy to discuss, I am FX Trader and Specialize in Hedging



:biggrin: it's the absence of prepositions gives em away


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## OhGreatGuru (May 24, 2009)

OnlyMyOpinion gave the best answer. If investing in US/International market is most important to you, you shouldn't care about the currency fluctuation, if you are a long-term investor. If the valuation of your portfolio in $CDN is important to you, you should rethink your investment strategy. (Someone who was investing the other way around could buy currency-neutral US index or international index funds.)


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## Eclectic12 (Oct 20, 2010)

twowheeled said:


> ... I invest in equities in the american exchange because information on them is readily available and I am heavy in certain sectors that I don't believe have the same strength or growth in Canada ... What advice would you give me? Should I only look at equities that trade on Canadian markets because I live here?


Where the opportunity only exists outside Canada, it may be worth it. Unless one is say a snowbird who will be spending USD, then the rates of exchange will affect what one has to spend. If there is a taxable account in play, the exchange rate will also affect what capital gain or loss one reports (ex. a big enough difference could turn a loss into a capital gain that is taxed).

It is not so much that it should be "Canada Only" but why avoid Canada completely with so much in just the US.




twowheeled said:


> ... I'm investing in where I believe the growth will be, I want to protect against the downside. I would ask you the same question, why do you invest in the canadian markets? Patriotism? Convenience?


Question is ... is there a Canadian multi-national that has large chunks of their business in the growth area? 
As an example, 1/3 of Bank of Nova Scotia's revenue comes from Latin/South America. Or there is also companies listed where the Head Office is about all of the assets, the rest are in Africa. Or if you look at CN's tracks, a lot of it is US. Or Canadian REITs whose only buildings are in the US.

The challenge as you have indicated is what currency fluctuations do to the final returns/$$ that one has.


As for why invest in Canada, as I can't fit everything into registered accounts - the more favourable tax treatment for dividends helps. There is also threads where comparing the TSX and S&P500 indexes show a slightly better return over the long term for the Canadian index.

As well, in a thread on RE, it was pointed out that buying the American listed stock of a Canadian bank meant the share price over ten years was basically returning one's $$ with growth being limited to dividends paid. The Canadian listed version had a share price gain of 90%+, in addition to the eligible dividends paid (taxed more favourably) with no currency risk to change the return numbers.





twowheeled said:


> that's a good point that I never considered because I typically do not invest in dividend paying stocks, and half the portfolio is in a TFSA anyway.


From what I recall, something like 85% of the TSX pays dividends while something like 75% of the S&P500 pay dividends. There may be enough room in registered accounts to avoid being more heavily taxed but if you keep accumulating assets, you could be affected. As an example of the difference, the Ontario tax payer that pays 6.39% on a Canadian company's eligible dividends with nothing going to the US gov't. Where instead a US stock pays the dividend, 29.65% is charged plus the US gov't takes 15% of the dividends where the foreign tax credit (FTC), if claimed - may return some/all of the 15% the US took.




twowheeled said:


> ... I am (or was) bearish on the Canadian economy. Who could have guessed the recent GDP growth or rate hike.


That is the problem with going one way only ... if it is right, everything is great. If it is partially right or wrong, it may not have been such a good idea.



twowheeled said:


> ... Right now I have no opinion on it, I just don't want exposure to the currency volatility. I don't want to invest in Canadian markets because I don't want to follow them and be up to date on the macro situation in Canada.


Interesting ... you are okay with investing in markets that are hard to get information on, that introduces one or more levels of currency risk and may have multiple levels of taxes charged but a market that info is easy to find for as you live there that has a better tax rate - you aren't interested in because of the work?


Cheers





twowheeled said:


> ... I am very lucky that my portfolio is still at par despite the loonie. I was just hoping there would be a cheap way to hedge. The option doesn't sound like it.


No offense ... but it sounds like you are trying to shut the barn after the horse has left. I'd have thought this would have been something to investigate before going into the USD/US stocks in a big way.


Cheers


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## Eclectic12 (Oct 20, 2010)

OhGreatGuru said:


> OnlyMyOpinion gave the best answer. If investing in US/International market is most important to you, you shouldn't care about the currency fluctuation, if you are a long-term investor.


Where it's one currency conversion to start and one to end, I can see this. Where there's money being transferred/converted in chunks, I am not so sure.

The assumption here is that everything fits into registered accounts. Once the US/International investments have to be held in taxable accounts, the tax rates will add an additional barrier that the growth has to overcome.


Cheers


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## twowheeled (Jan 15, 2011)

I think there's some confusion here, I do not hold all my assets in USD. I said in the first post that about half of my portfolio is in USD the other half being in ETF's in CAD. At my age I'm not buying anything that pays a dividend besides the ETF's which are in the RRSP. Those are the couch potato, plug along indexing, see you in 35 years investments that everyone here loves and can't stop preaching about. 

The USD half of my portfolio, I'm only looking for growth. Half of it is tax sheltered in the TFSA. It is money that I am comfortable speculating because I'm young enough to risk a large failure and get back on my feet. I want to have the freedom to get back out of USD and into CAD in case another opportunity arises like a canadian RE bubble. I like the US markets because they are a represent a large (1/3?) portion of the investable universe, and I can also hold international stocks through ADR's. Is there an equivalent in the TSX? I don't trust nor understand the financial sector. I am bearish on oil and gas. Personally I really don't understand where the growth in Canada will come from in the future. Consumer spending on credit?


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## atrp2biz (Sep 22, 2010)

Why not keep it all in CAD and get your US equity exposure through *XSP* or something similar?


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## fatcat (Nov 11, 2009)

twowheeled said:


> I think there's some confusion here, I do not hold all my assets in USD. I said in the first post that about half of my portfolio is in USD the other half being in ETF's in CAD. At my age I'm not buying anything that pays a dividend besides the ETF's which are in the RRSP. Those are the couch potato, plug along indexing, see you in 35 years investments that everyone here loves and can't stop preaching about.
> 
> The USD half of my portfolio, I'm only looking for growth. Half of it is tax sheltered in the TFSA. It is money that I am comfortable speculating because I'm young enough to risk a large failure and get back on my feet. I want to have the freedom to get back out of USD and into CAD in case another opportunity arises like a canadian RE bubble. I like the US markets because they are a represent a large (1/3?) portion of the investable universe, and I can also hold international stocks through ADR's. Is there an equivalent in the TSX? I don't trust nor understand the financial sector. I am bearish on oil and gas. Personally I really don't understand where the growth in Canada will come from in the future. Consumer spending on credit?


i think maybe you are asking too much ... i get your strategy, you like usa traded growth stocks which are based all around the planet using adr's for example ... this is a long term, let em run strategy ... but you also want access to cad in case of a bubble or some kind of crash, right ? ... logic would say that a shock to the system like a crash would almost certainly tank the dollar against the usd so i don't see the need for hedging

if i am wrong and you really feel a need for hedging then i would say that pie has it right and options against fxc or some similar vehicle would be the way to go

or buy a basket of commodity stocks like oil, gold and base metals which should rise with a weakening us dollar which should see the loonie rise as well


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## james4beach (Nov 15, 2012)

My employment income is in USD, so I have thought a lot about this currency hedging question. There's a lot of $ at stake for me, we're talking several hundreds of $K over the years.

One option for me would be to use some kind of currency hedge (e.g. short the USD, use FXC options, etc) to "lock in" a USD/CAD exchange rate. This would protect me from the possibility of a plummeting USD.

While thinking about this, I consulted with a Bay Street friend who works in forex trading. I thought that he'd encourage me to short the USD or use some kind of forex derivative, but he said exactly the opposite. He said that currency hedging is an inefficient process, and the cost to hedge -- such as the premium on a contract or the interest expense on a USD short -- isn't worth it for the protection gained. Not only that, but nobody knows which way the currency will move. It's really not clear if you're helping or hurting yourself by locking in a USD/CAD rate. He just thinks the "insurance" isn't worth buying.

Therefore, I did not hedge my USD income or try to lock in a rate. But unlike twowheeled, I have assets in CAD as well. I would suggest that the thing to do would be to have savings accounts or GICs/bonds in Canada. Leave your US exposures unhedged.


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## fatcat (Nov 11, 2009)

his etf's are in CAD
so i tend to agree with james that you might as well let it run and not worry about it

there is a horizons etf: CAN which you buy in CAD and it goes up if the USD drops so you get hedging protection that way

with FXC if you just buy the etf without options you end up making money if the CAD rises but you do so in USD so if you want to bring to canada you are merely locking money

with CAN you can make money simply with a rise in the CAD/USD fx


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## Jimmy (May 19, 2017)

I think you are hedged already for your US holdings. The USD is a good hedge against US stocks. When the USD rises, it hurts the US companies' exports which in turn hurts earnings and stock valuations. So currency gains are offset by lower earnings and their -ve effect on share prices.


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## humble_pie (Jun 7, 2009)

fatcat said:


> his etf's are in CAD
> so i tend to agree with james that you might as well let it run and not worry about it
> 
> there is a horizons etf: CAN which you buy in CAD and it goes up if the USD drops so you get hedging protection that way
> ...




a problem i can see is that to fully hedge the USD, an investor would need to buy a like amount of CAN or FXC. This is a large amount of money & it's doubtful the OP has such cash lying around begging to be used for a hedge. 

i imagine that's why the OP asked for a leveraged hedge in the first place, assuming that some options or futures were easily & cheaply available, which in turn would offset all the US dollars in his portf.

btw if one believed the greenback was going to continue to decline, could one not just short DLR? the amount of USD each DLR unit governs is fixed the moment investor buys/shorts the instrument.

a likely problem could be that it's not possible to put on a short position in DLR though, since the market is not liquid enough.

all in all, everybody here comes to the same conclusion. Buy only the proportion of US securities whose independent fates & fortunes can be tolerated for the sake of diversification and/or quality US growth. After that, accept whatever happens. Advienne que pourra! 

.


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## fatcat (Nov 11, 2009)

humble_pie said:


> *a problem i can see is that to fully hedge the USD, an investor would need to buy a like amount of CAN or FXC. This is a large amount of money & it's doubtful the OP has such cash lying around begging to be used for a hedge. *
> 
> i imagine that's why the OP asked for a leveraged hedge in the first place, assuming that some options or futures were easily & cheaply available, which in turn would offset all the US dollars in his portf.
> 
> ...


^ bolded part ... thats the conclusion i came to when i looked at hedging my usd stocks and especially my us dollar inflows ... for the small investor it isn't worth it ... just take the hit

though it doesn't hurt to own some of the commodities that typically go up when the usd goes down like oil and gold and other metals which is why i own oil primarily as i would prefer not to own it if i could ... though suncor pays a nice divy and they seem solid so i am ok with that

with respect to the op, he hasn't thought his usd investments through since he made his bet and should have had his hedging in place at the same time ... whatever it might be


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## Eclectic12 (Oct 20, 2010)

twowheeled said:


> I think there's some confusion here, I do not hold all my assets in USD. I said in the first post that about half of my portfolio is in USD the other half being in ETF's in CAD ...


I agree there's confusion. 

Half in USD adds currency risk to that half (may or may not be all that much of an issue, especially where the plan is for a US investment versus an investment that is adding a second layer of currency risk).

The other half was described as "The other half of my portfolio is in a hedged all world ex Canada ETF." Perhaps the "ex Canada" is leading me astray but this suggests the ETF despite being in CAD is outside Canada investments, adding more currency risk for whatever other country the investments are in. The ETF likely gets better currency exchange rates so that part may help.




twowheeled said:


> ... At my age I'm not buying anything that pays a dividend besides the ETF's which are in the RRSP.


IMO the first priority is whether it is a good investment that matches one's strategy versus dividends, minimal dividends or no-dividends.




twowheeled said:


> ... The USD half of my portfolio, I'm only looking for growth. Half of it is tax sheltered in the TFSA.


If some USD is taxable then as indicated earlier, any dividends paid will be taxed more heavily than Canadian company eligible dividends. Then too, when selling - the capital gains calculation will have to include USD to CAD conversions for the buy/sells.





twowheeled said:


> ... I want to have the freedom to get back out of USD and into CAD in case another opportunity arises like a canadian RE bubble.


Then with that freedome comes the currency effects. 


Cheers


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