Anyone spreading the currencies? I'm looking at trading the euro and swiss and the cross rate between them. I think the markets are too efficient for triangular arbitrage because of the automated trading going on. Also, if there are currency spreaders out there, what do you guys look at. And, why don't traders sell the currency futures and buy the currency cash, when we all know they will converge to the same price on the futures expiration. So today, the euro futures currency is about 50 ticks above the cash. If one would sell the futures and buy the cash, wouldn't you eventually make 50 ticks off the trade? What am I misinterpretting?
You are neglecting the negative carry on the cash leg of your arb trade, about -2.4% APR, and probably going higher between now and March. Say, you are short 1 6EH6 (March '06 Euro FX future) @1.2028 and long 125,000 EUR/USD @1.1971, actual price levels right now, shortly after 6 pm EST. That's a difference of 57 pips / ticks. Subtract the 2 bid/ask spreads, to unwind each leg, and you get around 54. At futures expiration on March 13th, 2006, your gain on the futures leg is: 54 x $12.50 = +$675. Over the same ~90 days, you'll pay about $9.84 carry (interest rate differential) daily, or -$885 total loss on your cash leg: http://www.oanda.com/products/fxmath/interest.shtml (Plug in 125000 units and 2160 hours, without any commas.) Net P&L: -$210, a loss. With different brokers, you'd lose more or less on the exact negative carry, but you're unlikely to lock in any risk-free arb between futures and cash, 99%+ of the time. The one exception is during any periods of extremely high volatility, when such arb may be momentarily possible... and has been pulled off at times, even by private traders. Obviously, that kind of arb is successfully completed within seconds or minutes, not months, and to properly play that game requires both automation and serious resources. Unless you are a global bank, probably not something worth pursuing for most people.
Hello everyone - I've been always interested in arbitrage possibilities in FX markets, but don't understand the problem very well. Late Apex, could you please explain me, in your example do we loose money because of EURUSD long negative interest? So if choose some other futures with pairs which yield positive interest when long, will this arb be possible? Thanks in advance! Best wishes Janis
No, a risk-free cash-futures arb will still not be possible (most of the time), even if holding a positive carry currency pair. The futures will always reflect that interest rate differential by trading at a discount to cash, as opposed to a premium (as in the case of Euro). Cable (Pound) has been a perfect example for a couple of years, but not anymore. After the most recent Fed raise, the March futures are trading almost at par with cash. Take a look at Aussie instead: March futures (bid) are at a ~19 pip discount to cash (ask), or ~22 pips after paying the two spreads to unwind the arb on the back end. So, your short futures leg will now be a -$220 debit per each 6AH6 (100,000) contract, rathen than credit (Euro). Meanwhile, you gain +0.9% APR (= 5.2% - 4.3%) by holding a long AUD/USD position. Over the 82 days left until March 13th, 2006, that's about +$148 credit. Net P&L: -$72. Sooo close... You might ask then, what if we do the opposite -- buy futures and sell cash? Good thinking... nice try, but you now gain as little as ~13 pips on futures (cash bid - futures ask - 3), or +$130 credit, while you lose as much as -1.825% APR (= 3.75% - 5.575%) on cash, or -$300 debit. Net P&L: -$170. Those pesky bid/ask spreads on everything, including borrowing / lending interest rates themselves...
Thanks alot Late Apex! I just found out while looking at futures and forex rates that really to hold an interest positive spot pair I need to open an opposite futures position which makes the picture look about the same as with EURUSD, but just mirrored. Otherwise we have no hedging and thus no freedom from directional risk... So, OK I suspected that such thing as a risk free money is not so easy to do. Happy trading to you! Janis
Right, no free lunch in forex, usually. Unless, of course, you do as ElectricSavant does, with PICS...