I'm trying to understand how Forex transactions work with the IB Universal account. (Yes, I have read the website). Let's assume I have $200,000 USD unencumbered in my IB universal account. I buy $25000 of AUD.USD cash Forex for a long term hold. I think the transaction goes something like this. IB loans me $25,000 on margin until settlement, converts it to AUD and buys the AUD, which they hold for me. After settlement, in my long term hold of AUD.USD, I get credit (AUD rate is higher) for the interest rate differential between the respective benchmark rates of the central banks (carry trade). Am I correct that this differential is not calculated using IB's retail rates? Also, I assume that I will not be charged margin interest on the long term hold as long as I keep enough cash in my universal account. I'm not sure of any of this.....can someone straighten me out? Thanks, Stosh
Thanks for such a complete explanation of something???? Perhaps someone ELSE could comment on my question. Stosh
Instead of using 'contracts' to make forex trades, IB uses accounts, or budgets. Assuming the base currency of your account is USD, when you make the long AUD/USD trade, it simply reduces your USD account by the relevant amount - which at the present rate of 0.8390 would be $20 975, and creates or increases your AUD account by 25 000. The interest is then calculated daily using the rates listed here: http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=llc So with these rates, your USD account with a net balance of $179 025, is paid interest at a current rate of 0%. Your AUD account of $25 000 is paid interest at a current rate of 2.405% (if it were over $150 000 it would get 2.655%). Because all of your accounts are positive you're not charged any interest - but if the trade was the other way around you'd be charged for being short AUD, or if your USD account was negative due to margin you'd be charged for that. So it's reasonably straight forward if you just think about the transactions as being transfers between different currency accounts.
Another way to think about it is that if you keep balances in USD you're being treated like a prisoner in Oz (the HBO TV show) by IB. They are making 1-2% on your cash and paying you zip.
Thanks, Big Funky.......that helps. Am beginning to see what you mean about thinking in terms of "accounts". Stosh
Bob, have you checked US treasury yields lately? .15% for one month and .49% for 1 year. http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml Also, don't forget the other side of the equation, we're charging from 1.67% down to .42% for margin. Compare that to other firms many of which start at 7.5%. That is an enormous spread which we could easily mark up 2-3% and still charge half of what the competition is offering.
def, I do understand I just wish there was a way to get some kind of yield. Even money market funds from your mutual fund providers would be nice.