Monday, July 9, 2012

speculator vs hedger in FX (my take

Here's an easy way to differentiate speculator vs hedger in FX -- Speculators have to "convert" back to domestic currency. They have no way to spend the foreign currency.

As soon as a speculator finds a way to spend $1k for that $1k she is no longer speculator. For example -- Buying online; Buying a gift for a relative; Tourism; Invest in a foreign asset such as securities or properties.

Multinational corporations the archetypical hedgers. They also occasionally engage in speculative trading.

Hedge funds and retail traders are the archetypical speculators. I feel Banks are typically speculators. The Singapore subsidiary of Citibank is like a "trader" who has to convert everything back to SGD. The "trader" starts with a seed capital in SGD and tries to grow it. At the end of the year, any cash position in another currency should be kept small because it represents exposure. The Singapore bank has no justification to keep that exposure because the foreign cash can't be used as cash. It's like a silver position in your portfolio.

Think about the "convert back". When do you convert to USD and never convert back? The real demand for USD is tied to the demand for US exports, including foreigners' demand for American securities and properties. (However, global oil is not a US export but is quoted in USD??) Now we realize the demand for any currency is ultimately determined by the nation's export. See also http://bigblog.tanbin.com/2012/04/1-driver-of-long-term-fx.html

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New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin