Using a Spread Bet to Hedge the Pound Value

It is quite easy to use a spreadbet to hedge the value of your pound.

Open a financial spread betting account and make a spread bet that the EUR/GBP will go up (Euro strengthens).  But be careful to bet just enough per point so that the Euro’s gain against the Pound makes you as much money as you lose in the real world. Make sure you go for the longest term possible (MAR-10, JUN-10, etc).

Just make sure you have a generous enough stop to account for minor fluctuations. If the GBP gains significantly against the EUR, your stop limit will be hit and you’ll have to pay. But, you’ll be paying safe in the knowledge that the amount you pay is equivalent to the amount you gained relative to the lads across the channel. If the market moves against the Pound, you’ll see the bet going very well. Don’t get excited, it’ll be money you’re losing in the real world and making back in a bet.

BTW, you’ll find that this is an interesting way to budget for all kinds of things. If you are going to go skiing next year, for example, and the exchange rate is good now, then bet so as to hedge or fix the current rate. You could nip on down and buy the real thing, but there’s a fair spread and no stop limit when you hold the actual currency.

Go to the your spread betting account and have a look at the EUR/GBP spread.

The Euro is worth: 71.40 pence.
The spread figures are quoted as: 7138–7142 EUR/GBP March 10
Now, you can BUY (bet that Euro will gain in value relative to the Pound) or SELL (bet that the Euro will lose value). You bet a specific amount per point. The amount that your bet is placed at is the one that is least favourable to you. So, if you BUY at 7138 and immediately SELL at 7142 at £1 per point, then you will have just lost £4. That is the spread that goes to the bookmaker. Spreads on the long-term bets will normally be larger.

Let’s hedge that £20K using the fictional spreads above. You’re in it for the long term so you go for:

7138–7142 EUR/GBP MARCH 10

You can use formulae to work it out, but I’ll do it by example. Suppose, £1.00 buys EUR1.401  (I know, I know the pound has been decimated but this is just an example). If the value moves to: 7238–7242 EUR/GBP, then £1.00 buys EUR1.381. That move of 100 points cost you 1.42% or £286 if you have £20K in the bank. Scary, yes?

If you had bought 7138–7142 EUR/GBP MARCH 09 at £2.86 per point, then the 100 point move would have made you £286 on the bet. In fact, if you have £20K in the bank or anywhere else and you fancy keeping its value relative to the Euro, then that is exactly what you should be doing. On the other side of the channel, people are doing the exact opposite, or perhaps there are people just hoping to get lucky. It’s their money you’ll have. Or they’ll have your money.

DISCLAIMER: PLEASE DO NOT BLINDLY DO THIS ON MY SAY SO! I personally did something like the above on EUR/GBP back in September ‘07 at 6960.  I viewed it as a hedge against devaluation – if GBP devalued, my savings would be worth less but my spreadbet position would make me money to compensate. If GBP increased in value, my savings would be (arguably) worth more but my spreadbet position would lose me money.

In fact, as time went on I got slightly more “sophisticated” and spread my bets across a basket of currencies. So instead of just EUR, I hedged a little bit against the Swiss Franc, Japanese Yen, Norweigan Krone and Swedish Krone … oh, and a sprinkling of Gold and Silver. I’ve actually gone a bit over-board and hold positions in excess of the amount of GBP savings I have. I don’t recommend this unless you’re very confident and can afford the losses if you get it wrong (and can handle seeing your “worth” swing by as much as a few £k on a daily basis – especially in weeks like this!).

This article was written by Andy who publishes a financial stock market guide, which specialises in offering free guides and information on stockmarket products such as financial spread betting

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