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GBP depreciates against USD for the next 3-6 months, how do you set up a trading strategy to take advantage of this knowledge? (please elaborate, very confused.)

GBP depreciates against USD for the next 3-6 months, how do you set up a trading strategy to take advantage of this knowledge? (please elaborate, very confused.)

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Answer #1

GBP depreciates against USD for the next 3-6 months

In the simplest of terms, this means we will require lesser USD to buy 1 GBP say 3 - 6 months than what we need today. If you think of GBP as a commodity or a stock the entire situation will start making sense.

So, assuming GBP is like any other commodity, it will become cheaper in next 3 to 6 months. What should be my trading strategy:

I should short (sell) the GBP today and buy it later to close my open short position. So my trading strategy will be to short future contracts on GBP. Under this contract, I have committed to sale GBP in 3 to 6 months at a particular, pre determined rate. In 3 to 6 months time period, the GBP will depreciate i.e. become cheaper than before. However I have still gained because my future contract will fetch me a higher rate.

The other trading strategy will be to buy Put option contracts on GBP with a pre determined strike price.The put option will generate gains if the GBP / $ falls below this pre determined rate.

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