PD,
There is inefficiency built into the market so between 3 pairs of currencies you'll experience some deviation from mathmatical perfection. That inefficiency does not exist for long periods of time or everyone would arb it. Also you are not buying exact amounts of currencies required to form a true hedge. This concept is called "Cross Hedge" but is actually a misnomer as it's not a 100% hedge. You are hedging out some risk of taking a single discretionary position. The graph I posted earlier shows EURCHF would have lost 167 pips while taking the EURUSD and the USDCHF cross hedge would have only lost 59 pips. This study was a completely random study. I arbitrarily picked entry and exit points and then recorded the prices of EURUSD and USDCHF and EURCHF.
There is inefficiency built into the market so between 3 pairs of currencies you'll experience some deviation from mathmatical perfection. That inefficiency does not exist for long periods of time or everyone would arb it. Also you are not buying exact amounts of currencies required to form a true hedge. This concept is called "Cross Hedge" but is actually a misnomer as it's not a 100% hedge. You are hedging out some risk of taking a single discretionary position. The graph I posted earlier shows EURCHF would have lost 167 pips while taking the EURUSD and the USDCHF cross hedge would have only lost 59 pips. This study was a completely random study. I arbitrarily picked entry and exit points and then recorded the prices of EURUSD and USDCHF and EURCHF.
It really is that easy.
