3 Options Brokers of interest, cost comparison: TOS, TastyWorks, IB

Discussion in 'Interactive Brokers' started by Sophie, Nov 30, 2017.

  1. Sig

    Sig

    To grossly over simplify, your ZAR will be worth 6% less in terms of USD a year from now, so when you get 6% interest but the ZAR is worth 6% less it's a wash. You can see this by looking at ZAR 1 year forwards which are 6% below current ZAR spot. Again a big oversimplification, but essentially no free lunch here (or anywhere else in finance for the most part).
     
    #11     Dec 8, 2017
  2. Robert Morse

    Robert Morse Sponsor

    This is not a flat number. It changes everyday. I don't have access to short stock borrow fees. The rest of your question is over my head.
     
    #12     Dec 8, 2017
  3. Sophie

    Sophie

    I understand it changes everyday, what is the current rate? for the short stock fees in %? specifically, if only had net liquidation of 5k and became short 100 SPY at 225 because of an assigned short call at 225?
     
    #13     Dec 10, 2017
  4. Sophie

    Sophie

    I finding it hard to understand, how the 1 year forward being 6% below current ZAR spot mean that it's worse than USD's current 0.66%, for staters l have no intention of keeping it for a year, perhaps months, then convert to USD for eg. if the pairing doesn't decrease more than 6%, l should be better off than the 0.66% from USD, correct?
     
    #14     Dec 10, 2017
  5. Sig

    Sig

    ZAR depreciates versus the USD. One ZAR is expected to be worth 6% less compared to the USD in a year than it is today. That's what the forward rate is. Since your ZAR is worth 6% less in a year (or 3% less in 6 months, the timeframe doesn't matter), then getting 6% interest only compensates you for this fact. Perhaps numbers will be useful, imagine you convert $100 USD to ZAR today. You get 1359 ZAR. At the end of a year, the forward rate is 6% below today's rate, so your 1359 ZAR in a year would convert to $94 USD. But, you're getting 6% interest on your ZAR, so at the end of the year you would have 1440 ZAR, which at the exchange rates in a year would yield you $100. You're right back where you started!
    Of course the exchange rates could move in any direction, you could end up with significantly less than $100 or significantly more. At that point you're just speculating on ZAR. However if you wanted to take the speculation out of it, by buying ZAR forwards, you would actually lose a small amount due to transaction costs. The free lunch in interest you're seeing is a mirage.

    Another heuristic I like to use when thinking about anything in financial markets is this: You believe you found a way to make 6% interest with no risk when the current risk free rate is .66%. The method you came up with isn't particularly arcane, anyone with any experience in finance and half a brain could come up with it. If the rest of the finance world isn't taking advantage of this opportunity, then they're either all idiots or there's a hole in your idea. I've found that when one of my ideas requires that everyone else in the finance world is an idiot, I'm the idiot.
     
    #15     Dec 11, 2017
    Sophie likes this.
  6. Sophie

    Sophie

    its clearer now, but can't claim l got a full grasp. so this is the situation, l have ~500K HKD in my bank account, and it receives 0%. l could easily use the HKD to buy USD or ZAR, and enjoy 0.66 or 6% respectively. So putting it in USD would yield the most in interest? even ZAR would be higher yielding than the 0% in HKD in my bank?
     
    #16     Dec 12, 2017
  7. Sig

    Sig

    Bottom line is that you can't make more money based on interest rate differentials by moving your money to different currencies. If your home currency is HKD, you'll end up with the same amount of money at the end of the day if you leave your money in HKD. If you want to play currency markets that's certainly a thing, just know that's what you're doing, not capturing an interest rate differential that doesn't exist.
     
    #17     Dec 12, 2017
  8. Sophie

    Sophie

    So l have a bank account in USA and HKG. The HKG bank offers 0% IR for all deposits, My USA broker offers 0.6% IR. Since my the money is in my HKG bank and earning 0% - inflation, would it not be better converted to USD and transferred to the broker? l don't understand why you said ' you'll end up with the same amount of money at the end of the day if you leave your money in HKD'
     
    #18     Dec 16, 2017
  9. Sig

    Sig

    Your money in your HKG bank earns 0%-inflation(hk). Your money in your USA broker earns .6%-inflation(us). You're probably assuming inflation(hk)=inflation(us). In reality, inflation(us)=inflation(hk)+.6%. So it doesn't matter where you leave your money from an interest rate perspective except that you lose money on spreads every time you convert it.
     
    #19     Dec 17, 2017
  10. Seems reasonable but you do take on some FX risk even though the HKD is pegged to the USD it does fluctuate.
     
    #20     Dec 17, 2017