new meat - help on yen
- Thread starter niceneasy
- Start date
No, at least I have never heard of a broker that charges interest on futures "margin". In fact it's not really margin to begin with, it's a performance bond. Margin interest is charged when you have actually borrowed money from your broker to open and maintain a position.
If your are holding a futures position for an extended period of time you may, depending on the contract, have to consider that a contract trading at a premium to cash will gradually decline in price as it approaches last trading day. And a contract trading at a discount to cash will gradually increase in price as it approaches last trading day.
No, interest charged on cash forex and currency futures is most definitely NOT the same in the real world, as I've explicitly stated above. Refer to the same IB link I gave above for details.
At IB, it costs you 1.5% extra per year for every 1:1 unit of leverage, if any, to maintain a reverse carry trade, long USD/JPY, in cash vs. futures. Why is that? Note the last line of the table called "Interest Expense Rates", showing what the interest debit will be for a short position of up to USD 100,000:
USD ..... 100,000 ..... BM + 1.5% .....
Essentially, that's why. Specifically:
For cash forex, USD/JPY:
1) you pay USD 50,000 x 6.298% / 365 = $8.63 debit daily
2) you receive JPY 0 credit daily.
If the benchmark rates were to stay the same, it would cost you $3,149 annually to maintain this position. After 5 years, you will have paid $15,745 in interest debits.
For currency futures, 6J:
Unlike cash forex, the implied interest rate differential (IRD) of currency futures has no built-in broker spreads. Whether you are a 1-lot player or get your currency tips at your weekly golf game with Warren Buffett, you still get the same, unadjusted, fair IRD. As each futures contract price converges to the inverse of the spot price at expiration, your effective net interest cost is going to be no more and no less than the futures implied IRD, currently, 4.8% or so. As opposed to 6.3% -- there's your difference, 1.5%.
Annual implied futures interest cost: $2,399 for every USD 50,000 worth of the futures. Est. annual savings of futures over cash: $750. Est. savings after 5 years: $3,750.
So, what's the big deal, you might ask? After all, that's just 7.5% of your beginning account balance of $50,000. Well, that's because we assumed an extremely conservative 1:1, no leverage. If your beginning account balance were $10,000, at 5:1 leverage, your savings would be 37.5% of that balance, hardly insignificant.
eureka!!
got it . thxs.
the mental hamster is back on the wheel.
i would be willing to bet that most traders at ib aren't aware of this. bit of a raquet really.you have to be marking 6-15% depending on leverage just to cover costs. not factoring in inflation, taxes, commissions, etc.... and god forbid you actually lose on a position...i am in the wrong biz!
best
nne
got it . thxs.
the mental hamster is back on the wheel.
i would be willing to bet that most traders at ib aren't aware of this. bit of a raquet really.you have to be marking 6-15% depending on leverage just to cover costs. not factoring in inflation, taxes, commissions, etc.... and god forbid you actually lose on a position...i am in the wrong biz!
best
nne
Glad that makes sense. That's exactly right, as the leverage is increased, it quickly becomes virtually impossible to overcome the combined "hurdle" of the IRD and broker's spreads, through yen appreciation against dollar. (Conversely, that's why the opposite, carry trade itself, long USD/JPY, leveraged up, can be so attactive, even with the perennial exchange rate risk and despite broker's spreads.)
Now, the main point of the above was to compare putting on this particular reverse carry trade via cash forex and currency futures at IB, ignoring all other factors that are equal. To be fair, one of those factors is that you receive ongoing interest on your account balance, regardless of whether / how you put on that trade. Currently at the same USD Benchmark Rate of 4.798% - 0.5% = 4.298%, for balances between $10K and $100K.
So, with that short dollar / long yen trade at 1:1 leverage, your hurdle rate to overcome is:
forex: 6.3% x 1- 4.3% = 2% (= 1.5% + 0.5%, of course);
futures: 4.8% - 4.3% = 0.5%.
In other words, 2% or 0.5%, for forex and futures, respectively, is the required annual appreciation of yen against dollar for a break-even on a reverse carry trade, at 1:1 leverage.
At 2:1, your annual hurdle rate is:
forex: 6.3% x 2 - 4.3% = 8.3%;
futures: 4.8% x 2 - 4.3% = 5.3%.
In general, at L:1, your annual hurdle rate is:
forex: 6.3% x L - 4.3%;
futures: 4.8% x L - 4.3%.
What you really want for this kind of long-term, reverse carry trade is a "Muslim" (interest-free) forex account...
Now, the main point of the above was to compare putting on this particular reverse carry trade via cash forex and currency futures at IB, ignoring all other factors that are equal. To be fair, one of those factors is that you receive ongoing interest on your account balance, regardless of whether / how you put on that trade. Currently at the same USD Benchmark Rate of 4.798% - 0.5% = 4.298%, for balances between $10K and $100K.
So, with that short dollar / long yen trade at 1:1 leverage, your hurdle rate to overcome is:
forex: 6.3% x 1- 4.3% = 2% (= 1.5% + 0.5%, of course);
futures: 4.8% - 4.3% = 0.5%.
In other words, 2% or 0.5%, for forex and futures, respectively, is the required annual appreciation of yen against dollar for a break-even on a reverse carry trade, at 1:1 leverage.
At 2:1, your annual hurdle rate is:
forex: 6.3% x 2 - 4.3% = 8.3%;
futures: 4.8% x 2 - 4.3% = 5.3%.
In general, at L:1, your annual hurdle rate is:
forex: 6.3% x L - 4.3%;
futures: 4.8% x L - 4.3%.
What you really want for this kind of long-term, reverse carry trade is a "Muslim" (interest-free) forex account...
The clarity in your explanations is remarkable, late apex!
Would you happen to have a link to any online reference explaining what bid and offer interest rates are used in calculating Globex currency futures prices, and how futures and spot price convergence works?
I've also tried to look up on how forward points in CME E-quivalents are determined, but to no avail.
http://equivalentsrdc.cme.com:443/
Thanks in advance!
Hi, I've never traded currencies before and didn't even realize the interest part of the game. Thanks to all the ppl helping out and explaining this, here is my question...
if I have 50k at IB and I want to buy 50k EUR/USD and hold it for 1 year, the current interests are 2.69% for EUR and 4.796% for USD
http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=llc#interest
How will the interests be paid out and charged?
Am I correct in assuming in one year
I will be paid 50k Euro * 2.69% = $1345
I will pay IB 50k Dollar *4.796%= $2398
thanks
if I have 50k at IB and I want to buy 50k EUR/USD and hold it for 1 year, the current interests are 2.69% for EUR and 4.796% for USD
http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=llc#interest
How will the interests be paid out and charged?
Am I correct in assuming in one year
I will be paid 50k Euro * 2.69% = $1345
I will pay IB 50k Dollar *4.796%= $2398
thanks
Quote from wwx:
The clarity in your explanations is remarkable, late apex!
Would you happen to have a link to any online reference explaining what bid and offer interest rates are used in calculating Globex currency futures prices, and how futures and spot price convergence works?
I've also tried to look up on how forward points in CME E-quivalents are determined, but to no avail.
http://equivalentsrdc.cme.com:443/
Thanks in advance!
Easy there, or this might go to my head...
In terms of the forward points, that's just the arb-free difference between a spot currency price and a futures price. In the real, messy, institutional world, every arbitrageur will have somewhat different costs of short-term borrowing and lending, and therefore slightly different forward points. Since there are a number of arbs, each keeping the currency futures prices fair, from their perspective, relative to spot, we end up with the futures prices we observe.
CME itself gets the data on forward points ("user-defined", they call them) from a third party, ICAP -- see the note on the right. Also, click on "How to Use" tab at the top and go over that screen.
In terms of linkage between spot and futures, I just googled it... here's one link:
http://www.fenews.com/fen33/back_to_basics/back_to_basics.htm
Seems to be easily accessible and covers both the logic / intuition and the basic formula. Have fun with it.
Not quite... don't forget those pesky broker's spreads, over / under the benchmark interest rates, as shown in those IB tables. You receive daily interest on your long EUR position at 2.69% - 0.5% = 2.19%. You pay daily interest on your short USD position at 4.796% + 1.5% = 6.296%.
Also, don't forget that you receive daily interest on your available account balance at 4.796% - 0.5% = 4.296%.
If the interest rates shown and the current EUR/USD exchange rate were all to stay the same (big ifs), you'd end up -- if I did the math correctly -- with around $325 in net interest, or $50,325 total, or 0.65% return after a year, pre-tax. If EUR/USD rate were to go up (down) X%, you'd also have a gain (loss) of exactly X% (thanks to 1:1 leverage), again, pre-tax.