Hedging Foreign Investments

Corey said: "I was wondering if people here have any experience using Forex to hedge their foreign investments. For example, if I wanted to invest in England, wouldn't it make sense for me to hedge whatever I invested in stocks equally in a usd/euro future. That way, the fluctuation of currency shouldn't have a result on my investment. I could play the stock as if it were in USD and not EUR. Is this how it normally works, or am I being dense? Also, does this mean that I constantly have to invest double for each stock I wish to purchase if I want to hedge this way? Seems like unless the stock was a sure thing you would be tying up a lot of capital that could be going to better use. Unless, that is, you could somehow use the stocks you just purchased to create the hedge. Would that work? Thanks, Corey"

thezster said: "You'll have to forgive what might come across as "dense" - as it's already past noon and I've been sampling my wife's products (everyone here knows what that means).... Hedging your bets comes across, to me, as a kindasorta waste of $$. Typically, I hear of people hedging their bets by buying/shorting a stock that is diametrically opposed to their initial play. What's the point? If one goes up, the other goes down - and vice versa... Keeping you from making any $$ on your original play..... Probably the Bud Celebration talking...... :o"

Corey said: "Well, to me, when you invest in a foreign exchange, you are also investing in the currency. Therefore, I see four situations arising: 1) Stock goes up and currency relation increases. 2) Stock goes down and currency relation increases. 3) Stock goes up and currency relation decreases. 4) Stock goes down and currency relation decreases. In case 1, you make more money. In cases 2 and 3, the gains and losses offset each other, and you don't get anything. In case 4, you lose a lot of money. So, its pretty much a 1/4 with stocks when using other currencies. However, if we hedge our cash in the other currency, no matter how the currency fluctuates, it shouldn't have an affect on our "wins" or "losses". So now lets say I buy a stock worth 500 Eur. I then hedge my bet against that stock by using a currency forward (which means, I guess, that I wouldn't have to use any cash). Now, whenever I 'close' the stock, any extra 'gains' or 'losses' created by the currency would be filled in by hedge (because it is [B]an exact opposite bet[/B]) -- thus, it is almost like I am trading in USD. Right? Wrong? I dunno."

Rickster said: "I think your logic is essentially correct. And I also agree with Z. All in all, it seems to me that if you have to invest in a given country, and you dont feel comfortable with the currency, hedging would be a good idea. But if you have a choice of countries, why not just buy stocks in the country with an exchange rate that you think will improve? Once apon a time I tried hedging my bets but it didnt work out well. I eventually came to the realization that I wanted to hedge because I was trying to compensate for my own weaknesses, and that I was no better at hedging than I was at playing stocks. So I ended up loosing at both. I think it is better to wait until you have some kind of edge and then play to your strength. YMMV"