IB - do I pay for continuously holding FX trade over weeks,months?

[Tomaz26]

I see. I though that if I attach the FX order it is no longer a loan.. I see your point. So guess what I wanted to know is this. I could just sell my EUR and buy USD. With USD in my account I could hedge via FX for the whole sum of my account. Now this is then the question how much would that cost. Having account in USD instead of EUR and hedging it via FX. 2 dollar fee + carry I guess. But how much that carry is I do not know. But I guess it should be a lot less than 2 %.. It is the difference between interest rates between EUR and USD right? So this should come something about 0.5 % a year.. But like I said I will probably solve this problem with futures. Almost all ETFs I am interested in have futures available. Hope I do not loose too much via spreads though.. Rollovers are cheap..

 

[JackRab]

Look at the link I send you earlier... those give you all rates charged and given to you by IB.

I think both EUR and USD have 0% on the receiving end.

Swapping all EUR into USD means you'll currency risk... I don't really get what your aim is?? What do you want, you live in Europe... so I would keep everything in EUR and either take the 1.9% or buy back the loans and have the long USD currency risk...

Long USD wouldn't be a bad thing in the mid-long term since they will be first to start raising rates and USD will appreciate against everything.
And you could argue that when USD appreciates a lot, the US equity market will drop... so all in all the risk isn't that massive anyway.

I wouldn't worry too much on FX trades... they are pretty cheap. It's about 2 euro fees when doing a 100k trade. And crossing the spread is nothing either since it's a tight market.

 

[Sig]

Look at the link I send you earlier... those give you all rates charged and given to you by IB.

I think both EUR and USD have 0% on the receiving end.

Swapping all EUR into USD means you'll currency risk... I don't really get what your aim is?? What do you want, you live in Europe... so I would keep everything in EUR and either take the 1.9% or buy back the loans and have the long USD currency risk...

Long USD wouldn't be a bad thing in the mid-long term since they will be first to start raising rates and USD will appreciate against everything.
And you could argue that when USD appreciates a lot, the US equity market will drop... so all in all the risk isn't that massive anyway.

I wouldn't worry too much on FX trades... they are pretty cheap. It's about 2 euro fees when doing a 100k trade. And crossing the spread is nothing either since it's a tight market.

Just a minor correction, the higher interest rate currency is the one expected to depreciate per the forward no-arbitrage curve. It won't necessarily do so, but at the very least the carry charge would reflect that expectation. So if you expect the U.S. to raise rates first, it would be the U.S. currency that would depreciate, not appreciate.

 

[JackRab]

So if you expect the U.S. to raise rates first, it would be the U.S. currency that would depreciate, not appreciate.

I would say no... I think you're talking about when rates are already higher...
First move on an interest rate increase is more demand in the currency and therefore higher USD. Basic financial relations... domestic interest rate up = exchange rate up.

When you compare a continuously high interest rate with a low interest rate country... then your case is realistic.

 

[Sig]

I would say no... I think you're talking about when rates are already higher...
First move on an interest rate increase is more demand in the currency and therefore higher USD. Basic financial relations... domestic interest rate up = exchange rate up.

When you compare a continuously high interest rate with a low interest rate country... then your case is realistic.

There's nothing to indicate that the forward no arbitrage condition would fail to exist when the rate first goes up, it's basic math and a basic forex concept. To spell it out, assume the U.S. and Lower Slovlack (L.S.) both have 0% interest rates. The U.S. raises their interest rate to 20%. At that point (that very instant!), I can borrow L.S. dollars (LSD) at 0%, convert them to USD and invest them at 20%, simultaneously enter into a 1 year forward contract at 1 USD=1 LSD, and at the end of a year have a 20% risk free profit. As a result, the day the USD interest rate jumped to 20%, arbitrage action will almost instantly bring the 1 year forward price of USD to price 20% lower than the LSD. Of course nothing says that the price in a year will be equal to the forward price a year ago, the forward price is purely mechanical based on the equation derived from the above. But the pressure is for the higher interest rate currency to devalue, starting the second it becomes the higher interest rate currency, not the opposite.

 

[JackRab]

@Sig, yeah... that is totally going to happen, a 0 to 20% in the US...

We're talking of raising rates at a slow pace, and the effect of the rise in domestic interest rate on the spot fx. Which is textbook upwards...

 

[Sig]

@Sig, yeah... that is totally going to happen, a 0 to 20% in the US...

We're talking of raising rates at a slow pace, and the effect of the rise in domestic interest rate on the spot fx. Which is textbook upwards...

The math doesn't change if it's a .5% or 20%; sorry you got hung up on that it was for illustrative purposes (secret: there's no such currency as an LSD either). Listen, this is "textbook" how forex works, it is in fact in every forex textbook and I'll be happy to photocopy a page out of my old textbook and post it here if you'd like. It's really silly to continue arguing if you want to ignore both the textbook answer and the math behind it. Obviously you have the potential for unlimited profit any time rates move since all the professionals will be behaving opposite you and you're right because you are. Good luck!

 

[JackRab]

I'll be happy to photocopy a page out of my old textbook and post it here if you'd like.

Yes please... no wait... I'll do it for you:

courtesy of Fred S. Mishkin

 

[Sig]

Yes please... no wait... I'll do it for you:
View attachment 166369

courtesy of Fred S. Mishkin

From my old copy of International Financial Management by Eun and Resnick on interest rate parity:

Which one is right? In related news, the Dec 2016 AUD/USD futures are trading at 0.7480 on the CME right now while the spot is .7509. The high interest rate (AUD) is trading lower in the future vs the lower interest rate (USD) than it is now, as it mechanically has to based on interest rate parity. And as all higher rate currencies do vs lower rate currencies absent some kind of capital controls. If you believe higher interest rates indicate an appreciating currency, but you can lock in a lower price for that currency in the future than today, haven't you just found the perfect arbitrage opportunity?

 

[Deuteronomy_24_7]

you can lock in a lower price for that currency in the future than today, haven't you just found the perfect arbitrage opportunity?

It's just a trade, like any other, not an 'arbitrage.' There are no arb opportunities in forex beyond the μs level.