I’m being thick here – can somebody explain why investing in foreign stock index futures limits currency risk to margin? Example in the reading (which I now remember I never understood) is a Swiss investor who is bullish on the US stock market but not on the dollar. The investor goes long an S&P500 Index future that, coupled with a currency hedge on the margin deposit, “would provide the Swiss investor with complete currency protection.” I get the idea that the inherent leverage in the futures contract mitigates currency risk. But if the dollar depreciates 10% while the S&P appreciates 20%, the Swiss investor is still going to take home less of a % gain in his or her DC than a US investor would in the same transaction, right?
i think they are not concerned what you may or may not earn… your exposure is only the margin - that is how i see it
I think so too… because the futures will be marked to market everyday, so the gains and losses will be netted everyday.
So Swiss investor deposits 30000 @ 0.9 /CHF = 33333 CHF in a margin account and hedges the 33333. Each day he will hedge the margin account exactly so that at the end of the day he gets 1/0.9 CHF/$ back. S&P gains 20% = 280 pts = $70,000/contract = 77,777 CHF. Thus, the Swiss investor earned 77777/33333 = 2.33x his money. The US investor would deposit $30,000 and get back 70,000 = 2.33x his money. Same, except he can’t really hedge the margin account perfectly like that.
Excellent – thx. Am definitely being thick at this point and wasn’t thinking in terms of daily mtm… Maybe time to stop studying…
I am just very worried “would provide the Swiss investor with complete currency protection.” with this. if that comes up with MC where the question will state that some one went long futures and hedged margin, will this be the answer?