Hedging Currency Exposure from Two USD Pairs with Options
Summary
The document considers a portfolio that is short EUR/USD and long GBP/USD, and asks how options could limit losses while preserving the possibility of gains. The key observation in the response is that the two positions create an implicit short EUR/GBP exposure: the USD legs partly offset, leaving a cross-currency position. One proposed hedge is to cover that residual exposure with a EUR/GBP call.
The response also suggests calls on EUR/USD and puts on GBP/USD as possible options to offset the original spot positions. A second answer emphasizes that FX options must be interpreted with both currencies in view: a put on one currency corresponds to a call on the other. The discussion is brief and does not specify notionals, strikes, maturities, premiums, or hedge ratios, so it outlines exposure logic rather than a complete hedge design. Any implementation would need to match the option positions to the portfolio’s actual sizes and risk horizon.
Key ideas
- Short EUR/USD and long GBP/USD leave a residual short EUR/GBP exposure.
- A EUR/GBP call is suggested as a way to cover that cross-currency risk.
- Options on the original currency pairs can also offset some spot exposure.
- In FX, a put on one currency corresponds to a call on the other currency.
Tags
Full text
# How to hedge two currency positions # How to hedge two currency positions Having two spot currency positions, ``` short EUR/USD long GBP/USD ``` We are looking for a way to diminish the risk of the spread going against us. The basic idea is to invert the positions, namely: ``` long EUR/USD short GBP/USD ``` However, this would not only eliminate the risk, but also any profits that might arise. We would like to be able to cancel the hedge position in exchange for paying a premium. How do we use options to execute this strategy? Would creating the following positions achieve the desired effect? ``` put short EUR/USD put long GBP/USD ``` ## Answer by rupweb (score 2) https://quant.stackexchange.com/a/31337 In that "portfolio" you've also got a short EURGBP position, because you're short EUR and long GBP and, both long and short USD some of which cancels out. So why not work out the amount you're short and cover that with a EURGBP call? Otherwise, yes you can use options to offset your positions: ``` call EUR/USD put GBP/USD ``` ## Answer by Animesh Saxena (score 0) https://quant.stackexchange.com/a/47442 In FX you always need to consider both sides. Probably question needs to be a bit ore clear short EUR/USD => Short EUR or Long USD So if you are buying Put on EUR it's a call on USD
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