Shariah Arbitrage

S

stevenpaul

Hi all,

There was a post regrading Arbitrage recently, and it brought to mind an idea I've been mulling over for some time regarding an Arb opportunity in the forex market. There are numerous brokers that offer Islamic Shariah compliant forex trader, i.e., no rollover interest paid or debited. In such an account, short positions in pairs like the EURJPY and GBPJPY aren't assessed daily rollover fees (to the tune of $20-$30 per day for every standard lot). If we could find an Islamic compliant broker that also offered trading in options, it seems to me we'd be in business: One could trade conversions and collect the interest embedded in the puts, without having to pay out the interest charges on the underlying spot position. Of course, the problem is that I can't find such a broker. MIG, an Islamic compliant broker, says they're going to be offering FX options soon, but no dates as of yet. Does anyone here know of Shariah compliant FX brokers offering trading in options also?

Ciao,
Steven
 
Of course, you would simply sell yen at MIG and buy yen in a swap account. Dealer buys yen from client and hedges OTC with short yen. Dealer is paying the swap OTC but receiving nothing from the client.

All dealers are aware of the arbitrage. No "zero swap" dealer is going to allow you to maintain a book of short yen in spot or the option-synthetic.
 
Quote from asap:

huh?

why dont you short gbp.jpy in the islamic side and buy the same pair here?
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The two broker idea is probably not viable for the reason Atticus points out: it's obvious to the broker what one is trying to do--take advantage of the Shariah non-usary policy for financial gain, at the broker's expense. Besides, it would be too difficult and risky to short an outright, unhedged position in one account and go long the opposing outright in another, swap-bearing account. In the event of a sudden big move, it may be impossible to transfer money from one account to the other in time to avoid a margin call and lock in on a loss. I do think, however, it may be theoretically possible to harvest the interest embedded in put options (well usually the puts, at least) and maintain a swap-free position, as no rollover is paid out by the broker on forex options. Am I wrong about that? They shouldn't lose on the risk reversal trade, I don't think, and thus shouldn't mind if we profit from it. Many Islamic friendly brokers charge a small fee (at MIG it's a one-time $5 fee per trade), so they even make a little something extra on this trade, over and above the spread.


Quote from asap:

wtf are you talking about?
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I called it a conversion before, but I meant to say risk reversal, as one would go short the underlier, sell a put, and hedge with a long call, with both options at the same expiration and same strikes, which is also the entry level of the short underlyer. Should be hedged of any profit or loss due to movement in the underlying market, but one collects a net credit from the sale of the higher priced puts--higher in price due to the rollover interest embedded in them. In a normal account, this would never work because daily rollover fees are assessed against the short position. In a swap-free account, no rollover fees are charged, making the put interest free. Problem is, I can't find a broker that offers Islamic forex trading and option trading. I just thought maybe someone here might know of one.
 
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