The ultimate carry trade

[Cutten]

Quote from FerdinandAlx:

How does a person borrow physical yen through IB?

Make sure you have a margin account - then either buy any Yen asset (what you would do in this case), or short cash Yen against another currency (what you would do for a conventional Yen-funded carry trade). You will automatically be given a Yen loan to the value of your purchase (or Yen sale) by IB, provided you have sufficient margin to meet it.

Regarding the FX risk:

1) You have your USD starting balance.
2) Buy some Yen-denominated J-REITs
3) Your broker gives you a margin loan in Yen to fund the purchase
4) You now own X Yen worth of stock, and owe X Yen cash. X - X = 0. Hence you have no immediate FX exposure to the Yen rate, at the point of purchase. Your only have FX exposure to the future P&L on the position - and you can just hedge it as soon as it gets to any significant level.

Alternatively, just buy Yen, buy the J-REIT shares, then hedge your exposure with Yen futures or forwards.

 

[Clubber Lang]

Some of the J-Reits that I follow are up big today.

8962.t (Nippon Residential) is up 6.86%

http://www.reuters.com/finance/stocks/overview?symbol=8962.T

8976.t (DA Office) is up 5.26%

http://www.reuters.com/finance/stocks/overview?symbol=8976.T

The six Japanese Reits that I follow are down 48%, 59%, 56%, 68%, 46%,and 64% respectively over the last year.

I've been waiting 3 months for any signs of life from this sector. This might be it.

Great thread Cutten. Glad to see some useful ideas being throw around (finally).

 

[ikkyu]

Greetings from Osaka,

This company's j-reit index shows a discount to NAV of around -8 (edit: as of early july). There is some other nice research here as well.

http://www.stbri.co.jp/english/market/jreit/nav.html

Man, the share prices are monstrous. Some are like 10k per share. I wish this country would get its act together and crank out some more ETFs, like a REIT ETF.

Nice topic.

Cheers,
john

 

[makloda]

http://uk.reuters.com/article/electionsNews/idUKMAR23787320080702
Dalton to raise $950 million for Japan REIT, buyouts
Wed Jul 2, 2008 11:31am BST

TOKYO (Reuters) - Activist fund Dalton Investments KK said it could raise up to about $450 million to invest in struggling Japanese real estate investment trusts (REITs) and another $500 million for a management buyout fund.

Junichiro Sano, head of the Japan affiliate of California-based Dalton Investments LLC, told the Reuters Japan Investment Summit the timing was right to invest in REITs with most trading well below the value of property on their books.

"We really like real estate and at the same time we really need the concept of distress," Sano said, adding that it has already secured capital commitments of about $300 million from overseas investors for a distressed REIT fund.
[...]

 

[sjfan]

How is it difficult to see that you have a very large FX exposure?

Say you want to buy $100 worth of a japanese asset. Today the exchange rate is about 107.21 JPY:USD and you exchange your dollars into Yen. So you bought yourself 10,721Yen worth of assets. A year later, let's say the value of your asset doesn't change and you sell it for exactly 10,721Yen, but the exchange rate is now 110 JPY:USD, you get only $97.46 back! That's a loss of a > 3% due to FX risk.

If you are borrowing using USD collaterals, the same logic applies; You will be responsible for the FX PnL (in the exact same way as if you are long a spot JPY:USD FX pair with a forex broker without any leverage).

What you've described is a classic uncovered currency arbitrage with a slight twist of using a risky asset instead of a riskless asset on the JPY leg. So now you get both FX risk + market risk.... probably shouldn't really call it an arb...

 

[makloda]

It's amazing to see how few here ever put on an asset/FX position pair in a non-base currency. Of course you can hedge out the FX risk completely (adjusting your position weekly/daily/hourly if necessary) and you just pay/receive the interest carry which is either negative or positive. How hard is that to understand?

 

[sjfan]

Quote from makloda:

It's amazing to see how few here ever put on an asset/FX position pair in a non-base currency. Of course you can hedge out the FX risk completely (adjusting your position weekly/daily/hourly if necessary) and you just pay/receive the interest carry which is either negative or positive. How hard is that to understand?

Or just take on a forward... but that's the point isn't it? There's FX risk unless it's hedged.

Actually, come to think of it - how *would* you dynamically hedge it with the spot? (unless you are thinking of constructing a synthetic option, which I don't think is what you are trying to do)

 

[pbj]

Has anyone trading on the Tokyo Stock Exchange using IB noticed that IB has set the minimum price variation for these J-REIT's at 1000 yen while that actual minimum price variation on the TSE is 100 yen? See this web page from the TSE

http://www.tse.or.jp/english/rules/equities/dstocks/index.html

I put in a ticket at IB for them to correct this, but so far there is no correction.

 

[vv111y]

I've got some questions to add too- what's the minimum lot on the TSE? Can you get odd lots on there? If so, what are the issues with that?

 

[nzbryant]

Cutten

I know you are not my stock analyst, but how do you find out info about Jap REITs? I read the FT and WSJ daily, and never see anything on this. Is it all in Japanese?