A nonconventional hedging strategy

I used to live in Switzerland for quite a few years and my son spent his happy childhood over there. This is a country almost everyone can love: quiet, peaceful, friendly, well-organized, truly democratic and humanely! By the way, I recently saw fierce debating on gun control. I’m not here to open the debate with anyone but just share a perspective why easy access to guns is not the fundamental cause of gun-related crimes. In Switzerland, general families commonly hold guns, even machine guns with ammunitions. Why so? Because by law, every adult man (I believe between 20-40) must spend a few weeks each year for military services. And they simply carry their guns back home during off time. But you rarely see or hear gun shooting crimes. Just a side note if anyone interested to further think about it.

So is there anything that we don’t like? Hardly any except one thing: the living cost that is really expensive. When we lived there, virtually anywhere else we went would bring us the feeling of cheapness, and often to a great deal! Fortunately Switzerland is small and very tolerant and compassionate. We lived along the border with Germany and every weekend, we just went to the German side to shop, which was not only much cheaper but we could also instantly got tax rebates. I guess most of the friends here probably could never imagine such kind of exotic unique life style. I’m really blessed for this unique life experience. In the weekends, in addition to that we mostly went to Germany for shopping, one routine we always followed was to go to MacDonald’s in the town. Our then baby son was so much loving the burgers there and especially the Happy Meals for kids. Not sure if they are still offering this as it is truly an addiction for kids because it includes also the cute toys. We are still keeping the collections of those tiny toys with great happy memories and want to pass them to our grandkids☺ ☺

So why I’m sharing all this stuff with you? Of course I’m not here to convince you to move to Switzerland but you should if you ever have a chance. Today’s idea is not about stocks but about the purchasing power of currencies. Ideally the purchasing power of all the currencies should be kept constant and the equivalent amount of money could then buy the same amount of goods. But this world is anything but ideal and there is wide range of changes regarding the currency purchasing power. Switzerland is not only rich and expensive but also unfortunately often has seen its currency, the Swiss Franc, overvalued. How do I know and measure? Well, there is an easy way to do so to compare currency valuation relative to the US$.  Here comes to my point of mentioning MacDonald’s.

Have you heard Big Mac Index (if not, check here)? This sounds funny but is actually a very easy and effective way to measure the value of currencies at a given point of time to see if one is overvalued or undervalued. Think about it. Mac burger is sold in majority of the countries all over the world and should cost the same amount as in the US if the local currency holds the constant exchange rate vs US$. But that’s obviously not the case due to various reasons. Right now, a Mac is sold for about $5.3 in the US but is sold for $6.8 in Switzerland. It means Swiss Franc is almost 30% overvalued against the US$. Among the major currencies that have ETFs, Japanese yen (FXY) and UK pound (FXB) are substantially undervalued by -35% and -17% respectively, relative to the US$. For major emerging markets, the Chinese yuan (CYB) and Indian Rupee (INR) are both over 40% less valued to the US$. See the BMI below as of Jan 2018.

With this knowledge in hand and if you want to do something outside of the stock market, then you may think about a hedging strategy by shorting FXF for Swiss Franc and going long for FXY, FXB, INR or CYB. You may likely be doing well in the months ahead as undervalued currencies tend to go up and overvalued currencies to go down by returning to the mean. In this very volatile market, try to think out of the box by doing something apart from the stocks. There are always some interesting opportunities out there as long as you are open-minded enough!