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bluewave
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Joined: February 10th, 2011, 5:30 pm

Currency Risk when Buying a Foreign Stock

August 9th, 2017, 5:28 am

I am in the US and my base currency is the USD. I want to buy 100K Euro of a stock which is denominated in EUR and listed on a European stock exchange.
The way my broker (Interactive Brokers) performs the transaction is that it will automatically create margin loan in EUR for me to buy this stock. (https://ibkr.info/node/722)

My question is: am I subject to currency risks when I invest in this stock, and how can I hedge them?
My goal is to capture only the price growth of the stock but not the currency movements.

Initially I was planning to short 100K EUR/USD to hedge the FX risk, but when I thought more about it, it was probably not the right move.
Now I start to think there is only currency risk on the gain of the stock, because IB lends me the 100K in Euro when I buy the stock. When I sell the stock in the future, the funds will be returned in Euro, i.e. only currency risk on the gains.

Is that correct? If so, how can calculate the size of the hedge when I place the trade? How much EUR/USD should I go short to hedge this 100K EUR position?

Thanks.