Investor Strategy Day

Thanks very much to Peter and the team for organising an insightful strategy day last week. The presenters and panels really held my attention. One of the many potential strategies I brought away was the commentary around hedging overseas investments against a potential rising Aussie dollar. I believe Charlie was suggesting a 50% hedge based on the current Forex “climate”.

My question is … how would one go about achieving a 50% hedging on say a AUD $25,000 investment. I understand the principles behind hedging, but I would appreciate some guidance on the practical application perhaps utilising the above example. One option being a direct investment on the NYSE with USD (equivalent to AUD $25,000) and the other option being a AUD $25,000 investment in an US ETF (say IVV) on the ASX.

I’ve heard of Forward Contracts and FX Options but I’m not sure how these or perhaps other strategies could be applied to provide the appropriate level of hedging. Can you please share your thoughts?

A: Thanks for the question.

On AUD 25,000, hedging is going to be pretty difficult. You could look at FX Options or FX forwards, however you are going to run into two problems:

a) notional contract size (too small for most banks to take you seriously); and
b) both are finite term hedges. At expiry, you have to roll them over.

A simpler alternative may be to look at IHVV iShares – the currency hedged version of IVV (tracks the S&P 500).

If you are okay with the US market, and happy with an passive exposure through an ETF, to be 50% hedged:

a) buy $ 12,500 of IVV;
b) buy $12,500 of IHVV.


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