Using ETF to currency hedge when moving to work overseas.

[danclarkie]

Hey, Mustachians.

I'm a Brit living and working in Dubai, within investment portfolio offshore in USD.
The UAE dirham is pegged to the USD so for the past few years I have not had any issues with currency hedging.

However, I am about to move to Kuala Lumpur to take up a job there and the Malaysian Ringgit is not pegged to the USD.
The Ringgit has historically been around $1 = 3.25 MYR  and my employment offer was agreed in USD but is paid in MYR at this rate.
There isn't much I can do about the fact the rate is below the current market rate, owing to a strong dollar.

My questions then are:

• Should I look to hedge the currency risk here?
• If so, by something such as the PowerShares DB U.S. Dollar Index Bullish ETF?
• If so, should I buy and hold (how much?), or buy up futures options?

• Should I be looking to tilt my portfolio to increase/decrease exposure to the Malaysian market?

Current portfolio is global market index funds, US corp bonds, US small caps, and REIT.

I would guess that a tilt away from Malaysia/SEA exposure might be the right idea, and something with a strong negative covariance with these might be along the right lines.
My job will be tied to the Asia-Pacific markets excluding China/Japan, so maybe there is an inverse APAC ETF that might be a decent play here?

Shorting a Malaysian broad market ETF would probably be a bad idea for a long term strategy.

[josstache]

I don't really see why you would need to hedge foreign currency risk unless you plan to hold new investments in MYR, or spend a large amount of money in MYR over the course of your time there.  It seems like the thing to do is  pay for your daily needs in MYR and toss the rest into your USD investments, even though that may incur an exchange fee.

[innerscorecard]

Hedging has a cost, and should only be done if there is a concrete reason.

Since your salary is actually in USD but simply paid in MYR, as long as you immediately transfer all your earnings after expenses, after every paycheck, you aren't truly vulnerable to currency fluctuations at all.

[danclarkie]

I interpreted the OP as saying that he is paid 3.25 MYR for each nominal US$, regardless of the exchange rate on the open market. So if OP's nominal salary is $150,000, then he would be paid 487,500 MYR, which is only US$139,102. In other words, he is being paid US$10k less than advertised, and it could get worse if the exchange rate becomes less favourable.

Correct!

This seems like a very unusual pay arrangement, but it makes the post make more sense to me.

If the employment agreement specified a particular amount in USD, this arrangement may be illegal, although I have no idea about the laws of this foreign country.

It's that my offer was made in USD which is normal for expatriate workers.
The exchange rate is fixed to give me a fixed MYR salary as I will be living and working in Malaysia.
My employer needs to file the paperwork for my visa in MYR and so on, and equally the employer is not willing to bear FX costs each month and pay a variable salary based on the USD/MYR rate.

To this end, they have made me a formal offer in MYR that is at a fixed rate of 3.25MYR/1USD.

Over the past 12 months the average rate has been 3.263735901 it is just that the dollar is currently strong pushing it up to just over 3.5 !

[dungoofed]

Hi Dan - congratulations on the new job.

If I understand correctly the main risk for you is inflation/increasing prices in MYR while the exchange rate stays the same or increases, which I'll be honest is a somewhat likely scenario. I don't have a fancy suggestion, but maybe opening a local trading account (in MYR) and making some initial purchases of gold, Malaysian REITs and/or Malaysian stocks would help offset the pain.