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How to Hedge a Brexit


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In our previous article we examined how likely it is that the U.K. will vote to leave the European Union (EU) and how a Brexit could affect its economy. In short a Brexit would likely involve a large drop in the value of the British pound and a slowing of the British economy.

How can investors protect themselves in the event of a Brexit? Well the easy answer is simply sell short the British pound and be done with it. But what if your brokerage doesnAAAt support currency trading? What other options do you have?

Go long the Swiss franc

The most popular alternative hedge for a Brexit is going long the Swiss franc. Numerous financial media outlets have written it up as an idea, and it has been frequently mentioned by currency strategists at the major investment banks.

The idea is that, because the Swiss franc is viewed as a safe haven currency, in the event of a Brexit it will rise. In the event that "Remain" wins the day, the thought is the franc wonAAAt fall very much since investors will be unwinding their sterling hedges. IAAAm not sure if I completely agree with that line of thinking. After all if every currency strategist is out there recommending the trade then how crowded is it becoming? Is it really going to be the situation that the Swiss franc wonAAAt be down that much if everyone is piling into it in an attempt to hedge a Brexit?

Furthermore, the Swiss National Bank has explicitly stated it will intervene to prevent the franc from rising AAAtoo high.AAA Given that the Swiss National Bank can print Swiss francs until he cows come home (subject only to political risks), it will be interesting to see how high the Swissie is allowed to appreciate. ItAAAs likely the Swiss franc trade will be a good hedge but perhaps not the great trade AAAno loseAAA trade itAAAs being made out to be.

The Guggenheim CurrencyShares Swiss Franc Trust ( FXF ) seems to be the best vehicle to implement the long Swiss franc strategy.

Go long the yen

The Japanese yen is another safe haven currency. I havenAAAt seen the idea of using the yen as a hedge written up as widely as IAAAve seen the Swiss franc hedge written up. ItAAAs possible that going long the yen might be just as good as a hedge as going long the Swiss franc. Additionally, the Bank of Japan hasnAAAt been as active as the Swiss National Bank in attempting to devalue its currency. Indeed the Swiss franc is up only about 4% versus the dollar this year compared to 13.5% for the yen. ItAAAs possible that the yen could appreciate more than the franc; as one of the least popular hedges it might have less downside risk should Britain vote to remain.

The Guggenheim CurrencyShares Japanese Yen Trust ( FXY ) seems to be the best ETF to implement the long Japanese yen hedge.

Go short the


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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks
Referenced Symbols: FXF , FXY , EUO



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