Hedging and making Interest

I've just gotten into a transaction where I bought GBP/JPY.

In order to hedge for the appreciation in JPY, I simulated a short position for GBP/JPY by selling GBP/USD and selling USD/JPY.


Since GBP/JPY = GBP/USD * USD/JPY

is selling GBP/USD and selling USD/JPY an effective hedge against a long position on GBP/JPY

I've notice my profit and losses fluctuating dramatically from -30 to +5. Is my downside risk completely limited?

did you take into account the fact that the per pip value of the currencies differ?

I understand that the per pip values are 8.09 for the JPY pairs and 10 for the GBP/USD


I understand there are imperfections in the prices of the currency pairs and that GBP/USD*USD/JPY will not exactly equal GBP/JPY but arbitrage won't occur unless the difference is so large that it can cover the cost of transacting and make a profit.... right?


I figure I'm safe because there's a limited range to the downside and upside of this hedge... is this correct?

You're probably not perfectly hedged. Your USD/JPY is quoted in Yen so it wouldn't be exactly one lot of each to get a perfect hedge.

Also... I'm going to bet you lose more swap in total than you gain. Brokers are smart like that.

Nikola you are right as rain. Too bad I don't have the ability to solve integral calculus in my head. ( I was just at the museum of Tesla in Belgrade.... UNREAL)


I better go figure out the perfect hedge until my position goes sour. I could potentially lose the interest differential that I was hoping for. We'll see if there's money to be made with that


Thank you

The only perfect hedge against the long GBP/JPY will be the short GBP/JPY and vice versa. Of course, then you have to contend with the swap.

Other than that, your math will be off as the prices fluctuate.

Obviously, the equivalent trade of the GBP/JPY in 2 parts is 1 lot of the GBP/USD and (1 TIMES the GBP/USD rate) lots of the USD/JPY

Thus, if the rate for the GBP/USD is 2.000 then the equivalent "hedge" is

1 lot of the GBP/USD and 2 lots of the USD/JPY.

However, it should be noted as the rate of the GBP/USD fluctuates, the lot requirements will vary, thus never giving you a perfect hedge except at equilibrium.