Acccual Interest

Discussion in 'Forex' started by pairtracker, Dec 1, 2006.

  1. Any trader can advise how could I have negative accrual interest
    when I bought EUR/CHF and USD/CHF. I tried to clear this issue with IB. But the message could not clear my concern, as EUR, USD have higher interest than that of CHF.

    Thanks for explanation.
  2. Not necessarily, in the real world of retail forex... As the name suggests, when it comes to interest debits and credits for your currency trades, you are paying "retail", not "wholesale" such as the local, currency-specific LIBOR rate.

    At IB, that retail v. wholesale difference comes to 2%, for all the majors, when trade size is under USD 100K. That's 1.5% spread over a short currency local LIBOR for interest debits, 0.5% spread under a long currency local LIBOR for credits, total 2%. That alone easily explains your EUR/CHF net debit / negative interest. (Wholesale LIBOR spread is about 3.32% - 1.84% = 1.48% < 2%, going by IB's published benchmark rates at the 2nd link below.)

    This issue was discussed in some detail a few months ago, within the context of a long-term dollar-yen reverse carry trade, futures v. spot:

    In addition, uniquely to IB, you don't get any credit under USD 10K or the equivalent in other currencies. This exclusion drives down your effective credit rate sharply, for smaller balances. In combination with the 2% factor above, this might explain your USD/CHF net debit as well, despite the seemingly untouchable LIBOR spread, currently about 5.29% - 1.84% = 3.45%.

    Have you looked at this page? It's fairly self-explanatory.
  3. Apex, thanks.

    I am going to study these.
  4. late apex:

    You are awesome.

    I will reconsider the timing of my trade. Your input is a reason why so many traders belong to this board!