Currency hedging options for USD income

Hi All,

I have future expected income in USD while my expenses are in JPY. This opens me up to risk if the JPYUSD exchange rate were to fall.

I’ve been looking into possible ways to hedge the USDJPY rate (using Japanese brokers), so that my future USD income will results in a more constant JPY amount regardless of exchange rate. My understanding is:

1) Currency options. Pay a fixed premium for an option to convert a set amount of USD at a fixed exchange rate at a future date (max 1 year). Saxo (only?) offer these in Japan. Seems ideal for my use case, as in the unlikely event I do not receive the USD income then I have no requirement to convert so no additional costs. And also if the yen weakens I will still benefit. Tax on gains from this I understand to be separate taxation/CG tax rate of ~20%? Example premium: 50k JPY to convert 10k USD at a rate of 137 in 1 year.

2) FX products (Forex CFD). Offered by many Japanese brokerages, leveraged long/short positions on currency pairs. Shorting USDJPY to match my expected USD income would effectively balance any change in rate between now and receiving the USD. Cost is from the interest rate difference of the pair, the current daily cost (swap points) for a 10k USD short is ~220 yen (80k JPY year). Margin required is 25x, ~60k JPY cash for 10k USD. This big downside to this is in the event I do not receive the USD income for any reason I would still be liable for the short position, and potentially lose a large amount if the USDJPY rate increased. Tax is separate taxation, ~20%.

3) Currency Futures. Sell a contract (on margin) to buy a fixed amount of USD on a certain date. Not clear if any JP brokers offer these (Saxo claims to but not tradable in demo account from what I can see). Current price for 1 year USDJPY future is ~137, so any difference between the real USDJPY rate and 137 at this date will be profit/loss. Cost is margin interest to borrow USD – for Saxo this is ~7%, or ~100k JPY per 10K USD. Tax rate not sure, but potentially same 20% as currency options/FX. Downside is same as FX, if my USD income is not received then I will still have this liability and potentially a large loss.

Happy to hear thoughts/corrections on any of the above, or if there are other options I haven’t considered. And also if anyone knows of any Japanese brokers supporting options/futures or confirm the tax treatment.

Based on the above, Currency Options seem like the obvious choice due to no additional cost if my USD income is cancelled, and benefiting from any positive currency rate changes. Any thoughts?

Thanks in advance.

by AnjinApple

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