I think you should have the same amount calculated in basecurrencies.

I think I have got a solution. Let me explain. Please post your comments here.

Let us consider GBPCHF, GBPUSD and USDCHF.

The Pip values and the Volatility in US$ for the pairs are as follows:

GBPCHF 8.18 868

GBPUSD 10.0 1270

USDCHF 8.18 794

Now, if we go long 0.59 lots of GBPCHF and short 0.25 lot of GBPUSD and 0.16 lot of USDCHF, the net volatility is almost zero.

0.25*10.0*1270 + 0.16*8.18*794 ~= 0.59*8.18*868. Thus, at the end of 20 days (that is the volatility I used), the net difference should be zero or very close to that. Using the swap rates posted on IBFX's website, the interest collected for each day will be $8.05. Thus, this appears to be a good hedge.

Hypothetically, if we use a $10k account and just use the above lots, we can earn 8.05*365 = $2,938 in interest with little risk. That is a 29% return per year. Of course, this assumes a lot of things remaining constant, but I hope I am able to explain the general idea.

Please post your comments and let me know if I have a bust in my calcs or assumptions. Thanks.

Which is the better hedge of the following two options and why?

A) 1 lot short of EURJPY, 1 lot of long GBPJPY and 1 lot long of EURGBP

B) The volatility of GBPJPY = $1200 per day

The volatility of EURJPY = $700 per day

The volatility of EURGBP = $450 per day

0.15 lots long GBPJPY, 0.50 short EURJPY and 0.35 long EURGBP.

Basically, will you hedge based on volatility or just use the fact that GBPJPY*EURGBP=EURJPY?

Thanks.