newguy wrote:I think if you're hedging you're essentially trading or market timing currencies.
Thanks. Being sort of a newbie, my instinct is to hedge to take fx out of the equation. Reading threads here I've realised that both
hedging and unhedging are plays on currency, except hedging costs something (and that something is actually substancial over time....say hedging+added tracking errors cost an additional 0.75 mer, that would be a compounded guaranteed loss of about 10% in 10 years -ie. a bad bet). So I decided not to hedge, but was asking myself if more than say 50% unhedged was prudent (I understand that I pay -with both mer and loss of upside- to cap downside with hedging, but wondered if that was a bad risk management strategy to, say, hedge so that foreign currency downside exposure is limited to 50%).
edit: actually, rethinking this, there is no "upside" or "downside" exposure....just lost returns either way. I mean, if I hedge and cdn depreciates relative to foreign currency, I lost returns and vice versa. Same if I unhedge. Both hedging and unhedging contain the same risk....hedging is just a tool, with implementation costs, to make a bet on currency. Unhedging is the same, but with no costs. So, unless someone has a bias towards cdn dollar appreciating enough to more than offset extra costs, it makes no sense to hedge. Basically, someone who doesn't know (ie. me) should not hedge rather than pay to make a bet he has no real basis to make. Correct?