Friday's bile

[peterbirks]

I managed to close out my England-Australia position to guarantee roughly equal profit no matter what the result -- the grand sum of a fiver. Which I promtly spunked away in some spur-of-the-moment god-i'm-bored fit of madness on the favourite at some race at Del Mar at 11pm UK time. At least, I assume the horse lost.

I also closed out the last of my sterling-dollar positions yesterday. After being hit for just over a grand, I was eminently grateful to get back to virtually even by the middle of this week. Get out, I said to myself. You don't really need to hedge your dollar position, since you aren't planning on converting the dollars back into sterling any time soon.

Far better to choose to report the figures of PJBirks plc (sole shareholder, P J Birks) in both dollars and sterling, and then to focus on which one looks nicest.

That's not to say that my currency speculating days are over. I just won't keep a long sterling position when I think sterling is going to fall.

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Comments

[jonathankaplan.livejournal.com]

...You don't really need to hedge your dollar position, since you aren't planning on converting the dollars back into sterling any time soon....

I don't agree with that statement, that situation might be when you MOST need to hedge the currency. Who knows where anything will be 10 years from now? (...Except, I am willing to bet all my yen that dollars will be worth less at that point.) There is less need to hedge the sooner you expect to convert, unless your resources are very tight, such that any shortfall is unrecoverable.
Currency hedging needs to get much more commonplace. We all live in a global economy now.

I really like talking about currency hedging and specific situations. If you want/need any feedback on any currency pair, I'd love to discuss it.


...I just won't keep a long sterling position when I think sterling is going to fall.

In all my years of trading, this has been one of my worst mistakes. Trying to ride out some adversity (which I see coming) cause I think it isn't worth closing out and waiting for a better moment has always been painful. Holding on to achieve a longer term tax treatment, buying early to make sure I am in when the move starts, not wanting to sell and rebuy cause of commissions, thinking like that has cost me much money. Now, if I have any trepidation at all, I am out, I'll catch it later (or not) and I have been much happier (and a little richer) for it.

_pjb_

[peterbirks.livejournal.com]

By "not any time soon" you should read "possibly never". In other words, I may spend my dollar winnings in dollars. Then again, I may spend them in pounds.

I initially took my long sterling position in October 2003 because I was as confident as I have ever been that sterling was going to rise against the dollar. However, I told myself that another factor was that, since I kept all my financial records in sterling, this was also a "hedge". Because, since sterling had been strengthening for some time, at that point I needed to win £25 a month just to keep my past (dollar) winnings at the same level (in sterling).

I realized the stupidity of this line fairly quickly (although I kept the position, which eventually netted me around £3K) when I started looking at the figures of some insurers. Now, there were those who had dollar hedges in place, and those who did not. For those reporting in sterling, those that did not have a dollar hedge in place appeared to be showing fairly sick figures. But this was all smoke and mirrors. As one company pointed out, money came in in dollars and sterling, and it went out in dollars and sterling. Although dividends were nominally paid in sterling, a proportion of the institutional investors worked in dollars. In the whole global scheme of things, a reduction in nominal sterling profit was counterbalanced by the fact that sterling was stronger against other currencies. To take out a hedge against something that only caused you harm because you happened to report in one currency rather than another was, the cleverer, non-hedging insurers pointed out, stupid.

In this sense, the same applied to me. Since poker was not my living, I had no need to know how much my dollars would be worth in September, and therefore I had no need to take out a hedging position. That I was recording my figures in sterling was serving to obfuscate.

I guess we (the ones who pay attention) are all just waiting to see when Mr Buffett will be proved right about the dollar. But if I am going to spend those dollars as dollars, it doesn't really matter to me if the currency depreciates against the rest of the world. However, by physically holding money in a currency, I am, by definition I suppose, taking a "long" position in it. But this would be the case for whatever currency I held the money in. By holding my money in two currencies, I am at least partially diversifying the risk.

Re: _pjb_

[jonathankaplan.livejournal.com]

The dollar WILL fall, it is really just questions of when/how far/from what point? Currency is just paper, no value in itself except what you can use it for. If all those non-dollar users keep piling up pieces of paper like that, eventually they should want to realize that value. Any method that realizes that value will cause dollar depreciation, pretty much.


...But if I am going to spend those dollars as dollars, it doesn't really matter to me if the currency depreciates against the rest of the world...

It matters more and more, the more globalization occurs and different goods/services become more internationally available/marketable.


...by physically holding money in a currency, I am, by definition I suppose, taking a "long" position in it. But this would be the case for whatever currency I held the money in. By holding my money in two currencies, I am at least partially diversifying the risk.

Yes, this is a natural hedge, one people should strive to do some of, if they have wealth. So, you have no need to hedge your "extra" currency, it is serving as a hedge by itself. In trying to hedge it, you were actually re-assuming currency non-diversification risk?

Re: _pjb_

[peterbirks.livejournal.com]

"In trying to hedge it, you were actually re-assuming currency non-diversification risk?"

Yes, this point occurred to me. My "dollar hedge" was in fact nothing of the kind. It was a reallocation of 100%-sterling exposure. If I only spent my money in sterling, on non-imported goods, or if I was a rampant sterling bull (either long-term or short-term) then taking a short dollar position was rational, but it wasn't a hedge.