In Excel: How to do forex currency trading to hedge out risk across countries during your long short spread trades
With this, you will be able to calculate implied currency risk. Forex trading is spread trading by default. You cannot buy one currency without selling another. There is no long or short entry price but just the spread. For watchlist, don’t forget to track the current spread as well.
If you buy allocate x GBP on a Asian stock listed on London, short x GBP for a Euro stock listed on NYSE (USD denomination). The London stock is y GBP vs the NYSE stock is z USD. If the GBP/USD rate is 1.5. This means you have x GBP with worth 1.5x in USD amount. This difference gives you an implied currency risk. If you buy the long in GBP, if you short you receive in USD. As a result, you have to do 3 trades. Buy the long in GBP, short NYSE stock in USD, which means you have to buy x GBP to hedge out the currency risk. These trades are akk done at the same time. If spread move 10% your way but the currency exchange moves 10% against you, you will not make money when you close out. You have to hedge out the currency exchange risk. You calculate your currency exposure by figuring out your buying currency vs the receiving currency. You will need to close out all 3 positions at the same time.
Only do this when you profit but start only within the same denominations.