Currency Pro's--- Does This Sound Viable?

Discussion in 'Forex' started by marketsurfer, Jan 21, 2009.

  1. does this sound viable or even possible?

    The strategy is based on currency arbitrage. There is no market exposure in this methodology so it protects the capital AND the return. In essence it is like a car odometer, account balances move in one direction - forward. Our EDIT is designed for investment safety, capital protection, zero volatility, enhanced returns and daily liquidity, all regardless of bear or bull market.

    We utilized the Pound against the Yen for some time, since margins have shrunk we now pair New Zealand with the US. The way in which the capital is protected is in the methodology. We take a long position on one currency pair and on the same pair place a short position in the same amount. No matter which direction the pair trades, the end result is that the capital amount remains the same. Creates a perfect teeter totter and therefore mathematically impossible to lose the capital. The way in which a yield is realized is that one side of the transaction is not charged interest due to the fact that we use a Shariah Compliant account.

    Essentially the way in which the engine stops running is if there is a fundamental change in the Islamic belief system and it becomes OK to charge interest, or there is a global flattening of currencies. I lose as much sleep over that as I do being killed by a meteor. And should that happen… only interest stops, capital is still there.

    In addition Funds are 100% liquid at all times. Fund requested typically received in 24-48hours

  2. Short answer is no, it's not worth doing unfortunately!

    The upside is you would earn around $4 per 24 hours on a 100k long NZD/USD trade (not the best pair for yield differential, a USD/HUF short pays roughly $20 per 100k)

    The downside is you need to have sufficient capital in both accounts to cover margin and drawdown, and also have plenty in reserve to prevent margin calls. You could shuffle funds between the two accounts but that costs money in transaction fees and takes time to be credited to the account, an unexpected wild spike could wipe out the account if it's insufficiently funded! The other thing is most (if not all) Shariah Compliant accounts charge an administration or service fee in place of interest for positions held overnight, if I remember correctly it was around 10 bucks last time I looked. Then there are inactivity fees which some brokers charge, and the risk that they'll ask you to close your positions and/or your account which is their prerogative. Then you've got to consider changes in interest rates, it's not that long ago when a long USD/JPY was a good carry trade, look at it now, a 100k long USD/JPY would cost around $3 per 24 hours, in fact Usd is being used as a funding currency instead of Yen!

    If that's not enough there may be other downsides which I haven't even thought about!

    Nice idea in theory but not really workable, you might be better off with just a traditional carry trade if you can stand the volatility and potential drawdown, and even then you may be locked in it for years and maybe even end up holding a negative yield currency if rates change significantly, and in this climate anything is possible!
  3. People do this, or at least try to, but those sharia accounts or whatever were tough to get from my experience - youre basically duping one brokerage. They are on the lookout for this and they will notice large negative carry trades with no volume for them to make money on in your account and get suspicious.

    On another level its pretty hypocritical to have one account that cannot pay interest for religious reasons being hedged off by one that has no problem receiving interest.
  4. Currency traders aren't renown for being ethical or religious, I doubt that would bother them too much :D
  5. It is perfectly logical in theory but not practice.

    Any broker offering the interest free accounts will not allow people to use the facility just so that they can borrow a high yielding currency at 0%. If you like it is like buying a $100 note for $5.

    If you find a broker who does allow it the chances are they are less than financially sound and more chance of them defaulting when repaying your capital back.

    I also read something recently where a broker had gone through all accounts retrospectively and deducted all interest due. I of course don't know if this is true.

    I would point out that this 'arbitrage' isn't new though and has been around for years.
  6. yes, and arbitrage + bucketshops = unsustainable
  7. How is this 'arbitrage' :confused:

    It's just taking advantage of interest rate differentials (IRD) and exploiting the free ride that existed (past tense) with brokers who offer Islamic account facilities.
  8. I believe the definition of arbitrage is simultaneously buying in one market and selling in another. You are long the interest and short the fake religious exemption.
  9. or, to be more technical, you are buy/selling and sell/buying the swap simultaneously, I believe.