A Canadian owning U. You must make two separate decisions - to buy the stock or not, and to hedge the FX or not. The tax treatment of exchange rate gains and losses for Canadian tax is covered by Interpretation Bulletin IT You can find the exchange rates at the Bank of Canada site.

At that time retail investors were asking repeatedly in the media " How can I hedge my US stocks? With one uniform message the industry told them " Don't hedge ". It was only after year after year of huge currency losses that hedged ETFs were invented, and surprise, surprise the industry changed their advice. In the intervening years they have never told retail investors 'how to hedge', other than with hedged ETFs.

Now inafter the Loonie has created a top trading range, and then fallen some, the issue has left people's minds.

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The long list of excuses rehashed here are no longer heard in the media. The industry advice now is more like " Hedge when you think the Loonie will rise with ETFs and don't hedge when you think the Loonie will fall. The next section has a long list of issues errors? There is one paper "Smart Currency Hedging for Global Equities" by Sanne De Boer, that has none of these errors. It's conclusion regarding whether it is better to hedge or not is pretty much For Canadian investors the benefits from hedging he found elsewhere are much reduced, mainly because the Loonie is pro-cyclical.

However his conclusions are tempered by a number of factors. The financial industry would certainly like you to think that exposing yourself to currency exchange risk REDUCES overall risk. They tell you repeatedly that you have no need to hedge. But their reasons are garbage.

Below are the arguments they use, with their counterarguments. Look at this year chart of the Loonie. There is no cyclical repeating pattern. When 15 big currencies are charted over ref: Optimists page 92 it is clear that currencies don't cycle.

Tell this line of bull to the Japanese or the Swiss. Losses from one currency will be offset by gains in another. The year chart of 16 currencies ref: Canadians and Americans would have lost from holding all the others. Their subsequent paper provides data for the 10 years tothat show every single major currency gaining against the dollar.

The authors MSCI paper use this qualifying assumption to discount the effects of a FX loss. They assuming you get an offsetting higher equity return and vice versa.

Before you can evaluate this idea you must understand the relationships between inflation, interest rates and exchange rates. The FX market is very large, but its players are short-term traders. The cash flows from their trades, and from foreign investments, determine FX rates in the short term. The long-run annualized returns in the table above hide the yearly volatility. In the longer term the flows of money dry up. People start comparing purchasing-power-parity between countries.

Inflation that originally drove up the currency has degraded the Purchasing Power Parity PPP. Foreigners figure they can get more bang for their buck in another country.

So the currency falls. So inflation has the exact opposite effect in the short run as in the long run. Investors care about the short-run. They gravitate to countries with smoking-hot economies and highly profitable companies. Their money flows strengthen a currency. The relationship between exchange rates and equity returns is direct, not inverse. The local price of a stock will appreciate in a country with high inflation. So FX losses due to inflation will be offset by higher nominal returns.

Inflation causes investors to discount prices more. They demand a lower earnings' multiple because market yields are high.

There is no correlation between inflation and equity returns. This was discussed on the Risks page. The argument misrepresents what diversification of investment securities accomplishes. Even while you presume all your investment securities will increase in value over time, not all will go up at the same time. Diversification of securities smoothes the volatility of your portfolio's value and makes sure you do not mis-pick only losers.

But no one expects all currencies' exchange rates to increase over time. Exchange rates vary in both directions.

Exposing yourself to a foreign currency increases your risk, not decreases it. Increasing the number of currencies you are exposed to increases the point-sources of your FX risk, but it does not reduce your risk.

You get rid of FX risk by staying invested in your home country or hedging. Even the MSCI paper referenced above had to conclude that hedging FX reduced the portfolio's volatility. Inflation at home will devalue the purchasing power of your own currency, so holding stronger foreign currencies will protect you. Even if it were working, as an investor you will gravitate to countries with smoking-hot economies - with their own inflation.

Holding the foreign currency will hedge that inflation. But not all probably little inflation is caused by FX rates. For Americans in particular, their buying power is so great they can dictate the currency in which deals are done. In mid 's foreign suppliers found that purchase orders received from the US were changed to be denominated in US dollars - because the US dollar was falling and Americans wanted suppliers to accept the FX risk.

Suppliers were told to suck it up, citibank credit card currency conversion fee they did. Hedging does not systematically improve or lower equity returns. What the authors mean by 'systematic' is 'averaged across all the different currencies and across time. But of course for every currency gaining strength there is the opposite losing value.

On average they cancel each other out. You improve your returns by hedging when the currency of your investment weakens. And by NOT hedging when the currency of your investment strengthens. Common sense should how much does a futures trader make you only the actual return and the FX change are relevant.

The inflation in the foreign country is irrelevant for evaluating your returns, or for deciding whether to hedge currency. Even Canadian inflation is irrelevant because all investment choices will be similarly impacted. Here is how they fudge the math to get the results they want that FX changes are irrelevant. They start with the correct, useful, and intuitive calculation of the returns to a Canadian investor in Loonies. In the long-run which is what they measureit is PPP that determines changes to FX.

The decision to remove from actual FX all the changes due to PPP guarantees that REAL FX approximates zero. They are talking about REAL FX changes. Their resulting equation does NOT represent ANY reality of an investing timeframe. Since Canada and US rates are so close you can cancel out any cost by using limit orders that let normal market volatility make up the difference. The cash funding of open futures contracts come from the daily settlements. If there is not sufficient cash your broker will consider it borrowed and charge you interest.

Ervaring foto op forex must realize that because this is a hedge, you are not 'losing' that cash. For every dollar you might lose in the futures account, the offsetting investment in the foreign security will have gained the same amount. Agreed, you cannot liquidate that cash daily, but currency trading course toronto value is there.

This method is preferable to buying Futures contracts when there is risk that the Loonie may fall in value for any extended period in which you would have to fund where are corn futures traded loss from a futures contract.

But when US borrowing rates rise, this strategy ends. Stock market advance decline proceeds from creating the debt must be invested in Canadian assets.

You can buy the Loonie currency ETF e. N-FXC when you are less sure of a leveraged play. Or you can create a 'carry trade' by. The future's market price starts with the current index value, reduces it for the dividends you will not receive, and increases it for the bank interest you moving averages strategy trading earn by keeping your cash until the contract's end.

It has been only a very small percentage for a long time. There may be much less trading on these contracts, so watch the pricing. Notice that these contracts are reversed from the large contracts.

These are "to buy US dollars and to be paid for in Currency trading course toronto at the end of the contract". So to create a US dollar liability you would SHORT this contract.

While the collateral required for normal FX futures contracts can be invested in productive assets, here it is cash. Your 'cost' is the income forgone on that collateral.

This is not really a good option. If you buy the ETFs you are using some of your principal. Hedges only work if they cost little or nothing - so they have no opportunity cost.

However, buying the Loonie ETF on US dollar margin - without foregoing any stock purchases - creates a hedge with a cost only equal to the interest cost of the margin debt.

Free stock ticker widget for website these ETFs requires no principal. Canadians can short the USD by shorting the Canadian issued T-DLR not the DLR-U.

Americans can short the Loonie by shorting the American-issued ETF N-FXC. These ETF products work well to fine tune large futures contracts. Since the futures contracts are for large denominations he cannot fine tune them. However, if a Canadian owns Euro denominated assets, he may want to short the American-issued Euro ETF.

The problem is that this deposits US dollars into your broker account. So while the Euro gets hedged, you now have US dollars NOT hedged. You could withdraw the proceeds from the short sale and repatriate them to Loonies, but then your broker would charge interest on the money withdrawn and the FX swap will have its own cost.

You can also buy options on individual stocks.

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The rest will be hedged if you keep the remaining money in your home currency. See the discussion on Leverage in Options. Just to make things complicated: Similarly with an ADR. So the Loonie buys more US shares than before. But that does not mean you get more value than before. When you buy a consumable whose use is measured in pleasure, the stronger Loonie allows you to buy "more" enjoyment than in the past.

It costs less now to get the same amount of pleasure. Now is the time to buy "with the dollar on sale". But this is not the way to approach the purchase of investments. With investments, you are not so interested in buying the 'asset', as you are interested in buying 'income' or 'capital gains'.

Those profits are denominated in the same foreign currency.

The shrinkage completely offsets the increased number of shares. At all exchange rates your 'rate of return' measure in Loonies will equal the rate of return earned by Americans measured in USdollars. No matter how strong the Loonie was, the value of the profits in Loonies, will be discounted by exactly the same rate that the cost of the assets was discounted.

They have not made investments 'cheaper'. The concept of buying stocks 'cheap' implies a higher rate of return. But the strengthening Loonie has impacted both the cost AND the profits of investments equally.

The 'rate of return' remains the same. This argument is different from the argument, often made at the same time, that now is the time to buy US dollars because "exchange rates are cyclical and the Loonie is bound to retrace its gains". First consider revenue and expenses. These are not a problem. The operating results from another country are translated into the reporting currency at the average FX rate over the period. Granted, the investor is forward looking, and would like them translated at the most recent FX rate, but the average rate is disclosed in the notes, and he can make his own assumptions about the future.

Most businesses consider it good management to match revenues from a country with costs from that same country, so that the FX risk is limited to the profit margin. It should be obvious to the investor when this is NOT the case: The problem lies in the translation of the value of foreign assets and debts. The FX translation effects are reported in three ways.

Management often say they have hedged their foreign assets with offsetting foreign debt. Even where this is true, the reporting of the FX effects may show up in different places.

There is nothing an investor can do except measure what is available to be measured, and make sure it is all included in comprehensive earnings.

There are two arguments made for NOT including FX changes in the Income Statement. When the financials are used to evaluate management it is not appropriate to make management responsible for investors who live around the world.

But for the investor the issue of evaluating operations managers is minor. When the foreign operations are considered permanent, with no expected repatriation. Why worry about a write down that may never occur? But the presumption that there will be no repatriation is not valid.

Expansions into specific countries often flop, with the assets withdrawn. Divisions are often sold, with the proceeds redirected around the world. The US tax amnesty of prompted millions of dollars to be repatriated from abroad. Even that condo in Florida will probably be sold to fund retirement home costs in Canada. Their arguments are not consistent. Everyone agrees that all debts should be revalued to the current exchange rate, so why not all assets?

Not revaluing assets reflects only the accountants' attachment to historical cost accounting. People that agrees with the revaluation of some Balance Sheet items still object to recognizing the change in value as Income. But Income is defined as 'the change in value'. You cannot both accept the Balance Sheet change AND reject its recognition as Income.

Investors should be able to see both the operating results and the FX translation effects separately, so they can project the future, separately, of both the operations and exchange rates. Unfortunately, the reported information is not enough to make these two evaluations. HOW TO HEDGE FOREIGN CURRENCY A Canadian owning U. To Hedge a U. Stocks Now While The Dollar Is On Sale How Do I Understand the FX Reported in Financial Statements?