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new meat - help on yen

  1. id like to buy some yen through i/b. ive never traded currencies but want to diversify away from USD a bit and like what i have been reading/studying about the yen. this is a long term play....

    what are my options?any help would be greatly appreciated...i know nothing....
  2. my question is regarding currency pairs
    specifically, i am looking to buy, go long, the yen
    i have quotes
    jpy/usd cash quoted at 117.89
    and usd/jpy cash quoted at .008529

    these seem to be quoted opposite to any other currency pairs in charting packages etc....
    so if i am speculating that yen will go up and usd down - which one do i buy?
  3. If you think the Yen will appreciate in value, you would sell the USD/JPY pairing.

  4. As DRT indicated, one option for you would be to enter an order to SELL a certain USD amount of "JPY/USD Cash USD.JPY" (Underlying = USD), quoted at 117.xx. That's the cash forex dollar/yen pair at IB.

    Option #2 would be to enter an order to BUY 1 or more of "JUN06 Futures 6JM6" (Underlying = JPY), currently quoted at 0.0086yy. That's the Globex Yen future contract. (There's also one on EUREX.)

    Option #3 would be to express your long-term dollar / yen view via options. Sounds like you want to keep it simple, though, so let's leave that one off the table for now...

    Normally, for a long-term play, you'd want to deal in cash, not futures -- everything else being equal, which it is here, with the same broker. First, no worrying about rollover 4 times a year. Second, more flexible trade sizing and ability to scale in or scale out.

    However, there's more to it than that. As usual, devil's in the details... Before you take the plunge, are you fully aware of the interest costs? Short USD / long JPY is a reverse carry trade. It'll cost you dearly at IB. Right now, you'll pay 6.295% on the USD part (up to $100,000) and you'll also pay (rather than get paid) from 0.439% to 0.189% on the JPY part, for a total of 6.5%+ annual drag. See this for details.

    So, let's say, your directional forecast turns out to be correct. If you were to hold this position for a year, and yen ends up at, say, 106 (a nice 10% appreciation against the dollar), your total return would be only about 3.5%. That's ignoring any further widening of the interest rate differential (IRD), yet to come this year. And before taxes, if any.

    To be fair, that % return is applied to the (leveraged) position size, not your account balance. E.g., with 5:1 leverage, you'd make around 17.5% total return in that (good case) scenario, before any taxes.

    On the other hand, if you were to put on this position via futures, not cash, the implied IRD would still work against you, of course, but at a more reasonable 4.5% or so, currently. That's an extra 2%+ a year unleveraged, or extra 10%+ P&L at 5:1, and so on. If that matters to you, you need to weigh that extra futures P&L against the cash advantages for this purpose, mentioned above. Your intended 1) position size, 2) leverage and 3) time frame would be the key factors in a decision of cash vs. futures as the best tool for the job. Feel free to post them here, for more specific advice. Have fun.
  5. ack. sorry - im still foggy... just about the interplay of terms usd/jpy and jpy/usd.... they seem to be used interchangeably which i dont understand as one is 1.17 and other is .008529. I am an old guy so the hamster doesn't run as fast on the wheel as he used to!

    jpy/usd cash quoted at 117.89
    and usd/jpy cash quoted at .008529

    if i sell jpy/usd cash quoted at 117.89 = effectively long yen/ short us dollar?

    what about buy usd/jpy cash quoted at .008529?? = long yen?

    and 2. - you are paying interest on these trades even if you have the cash to cover them in your ib account?

    late apex - i am thinking about buying 50k in yen. holding time of 5 years say. i don't need or want to pay interest for margin

    thanks again for replies
  6. Correct, the answer is yes to each of your 3 questions.

    The instrument "USD/JPY Cash JPY.USD" (Underlying = JPY) quoted around 0.0085 is traded on IDEAL, not IDEALPro. I'd ignore that one, not so much because of much wider spread (16+ vs. 2 pips) on entry and exit -- less important over 5 years -- but because it's neither here nor there... a hybrid mix of cash forex and futures attributes. You probably won't see anything like it at other dealers or quoted in the media.

    $50K is worth less than half of a single 6J future contract, so that's not a viable option, unless you're flexible on position size or willing to deal with the E-mini yen future, half the size of 6J.

    Question for you: sounds like you've got more than $50K margin for that $50K position, is that correct? That would be leverage of less than 1:1. Are you sure about that? Seems to me, 10% or even 20% (if yen strengthens all the way from 118 to 94) is not a particularly attractive cumulative return over 5 years, pre-tax, even from a passive, buy and hold currency play. You could do as well or better by buying risk-free Treasury notes, with no currency risk, either.

    Also, now that we know your parameters, I think another way to monetize your long-term dollar / yen view may be "none of the above". Why not open and fund a separate account, this time with JPY as the base currency?

    Better check with IB on the details, but, from what I can tell by looking at that link, a yen-denominated account currently neither pays nor charges you any interest. Do nothing else in that account until you are ready to close it and convert the proceeds back to dollars, a few years from now. At that time, your realized total return will reflect the exact relative change of yen vs. dollar between now and then. (As usual, ignoring taxes, if any.)
  7. hats off to late apex. a great big thank you for taking the time to help me out. you are very kind to share your insights and in detail too.

    i really like this trade the more i research it. there is effectively anywhere from 750 billion to 3 trillion (T) USD in yen carry trade floating around. the implications of this, as i understand them, is a huge potential short covering in the yen. coupled with:
    -a weak outlook for the USD
    -current account surplus in japan
    -BOJ has stopped the printing press and consensus is rates are going up
    -general increase in consumer strength and economy as well as increase in prices

    could get interesting....

    i also understand japan may be in no hurry to raise rates quickly or they could cause a massive mess - but i can see it playing out over the next few years. and at the very least - i own a little less USD which is comforting and ultimately my objective for doing this in the first place....

    i'd invite any other ideas/participation if i am missing the mark on any of this...

    thanks again apex....
  8. does i.b charge interest on the margin for currency futures? i can't find it on the site or the ideal site...


  9. Remember if you planning to sell usd/jpy & hold it for a long period it will cost you a lot of money because of a daily carry interest you will have to pay. Check out other alternatives like bying japanese stocks.
  10. thanks - but what about futures? you have to roll - but do you have to pay interest on the margin on currency futures?
  11. Actually I have to take it back. Interest charged in forex and interest on futures are about the same. Around 5% a year of your position. So don't overleverage usd/jpy if you are planning to hold it for a long time. I still believe that nikkei index is a better option in a long run.
  12. No, at least I have never heard of a broker that charges interest on futures "margin". In fact it's not really margin to begin with, it's a performance bond. Margin interest is charged when you have actually borrowed money from your broker to open and maintain a position.

    If your are holding a futures position for an extended period of time you may, depending on the contract, have to consider that a contract trading at a premium to cash will gradually decline in price as it approaches last trading day. And a contract trading at a discount to cash will gradually increase in price as it approaches last trading day.
  13. No, interest charged on cash forex and currency futures is most definitely NOT the same in the real world, as I've explicitly stated above. Refer to the same IB link I gave above for details.

    At IB, it costs you 1.5% extra per year for every 1:1 unit of leverage, if any, to maintain a reverse carry trade, long USD/JPY, in cash vs. futures. Why is that? Note the last line of the table called "Interest Expense Rates", showing what the interest debit will be for a short position of up to USD 100,000:

    USD ..... 100,000 ..... BM + 1.5% .....

    Essentially, that's why. Specifically:

    For cash forex, USD/JPY:

    1) you pay USD 50,000 x 6.298% / 365 = $8.63 debit daily

    2) you receive JPY 0 credit daily.

    If the benchmark rates were to stay the same, it would cost you $3,149 annually to maintain this position. After 5 years, you will have paid $15,745 in interest debits.

    For currency futures, 6J:

    Unlike cash forex, the implied interest rate differential (IRD) of currency futures has no built-in broker spreads. Whether you are a 1-lot player or get your currency tips at your weekly golf game with Warren Buffett, you still get the same, unadjusted, fair IRD. As each futures contract price converges to the inverse of the spot price at expiration, your effective net interest cost is going to be no more and no less than the futures implied IRD, currently, 4.8% or so. As opposed to 6.3% -- there's your difference, 1.5%.

    Annual implied futures interest cost: $2,399 for every USD 50,000 worth of the futures. Est. annual savings of futures over cash: $750. Est. savings after 5 years: $3,750.

    So, what's the big deal, you might ask? After all, that's just 7.5% of your beginning account balance of $50,000. Well, that's because we assumed an extremely conservative 1:1, no leverage. If your beginning account balance were $10,000, at 5:1 leverage, your savings would be 37.5% of that balance, hardly insignificant.
  14. eureka!!

    got it . thxs.

    the mental hamster is back on the wheel.

    i would be willing to bet that most traders at ib aren't aware of this. bit of a raquet really.you have to be marking 6-15% depending on leverage just to cover costs. not factoring in inflation, taxes, commissions, etc.... and god forbid you actually lose on a position...i am in the wrong biz!


  15. Glad that makes sense. That's exactly right, as the leverage is increased, it quickly becomes virtually impossible to overcome the combined "hurdle" of the IRD and broker's spreads, through yen appreciation against dollar. (Conversely, that's why the opposite, carry trade itself, long USD/JPY, leveraged up, can be so attactive, even with the perennial exchange rate risk and despite broker's spreads.)

    Now, the main point of the above was to compare putting on this particular reverse carry trade via cash forex and currency futures at IB, ignoring all other factors that are equal. To be fair, one of those factors is that you receive ongoing interest on your account balance, regardless of whether / how you put on that trade. Currently at the same USD Benchmark Rate of 4.798% - 0.5% = 4.298%, for balances between $10K and $100K.

    So, with that short dollar / long yen trade at 1:1 leverage, your hurdle rate to overcome is:

    forex: 6.3% x 1- 4.3% = 2% (= 1.5% + 0.5%, of course);
    futures: 4.8% - 4.3% = 0.5%.

    In other words, 2% or 0.5%, for forex and futures, respectively, is the required annual appreciation of yen against dollar for a break-even on a reverse carry trade, at 1:1 leverage.

    At 2:1, your annual hurdle rate is:

    forex: 6.3% x 2 - 4.3% = 8.3%;
    futures: 4.8% x 2 - 4.3% = 5.3%.

    In general, at L:1, your annual hurdle rate is:

    forex: 6.3% x L - 4.3%;
    futures: 4.8% x L - 4.3%.

    What you really want for this kind of long-term, reverse carry trade is a "Muslim" (interest-free) forex account... :p :cool:
  16. The clarity in your explanations is remarkable, late apex!

    Would you happen to have a link to any online reference explaining what bid and offer interest rates are used in calculating Globex currency futures prices, and how futures and spot price convergence works?

    I've also tried to look up on how forward points in CME E-quivalents are determined, but to no avail. :(

    Thanks in advance!
  17. Hi, I've never traded currencies before and didn't even realize the interest part of the game. Thanks to all the ppl helping out and explaining this, here is my question...

    if I have 50k at IB and I want to buy 50k EUR/USD and hold it for 1 year, the current interests are 2.69% for EUR and 4.796% for USD

    How will the interests be paid out and charged?

    Am I correct in assuming in one year

    I will be paid 50k Euro * 2.69% = $1345
    I will pay IB 50k Dollar *4.796%= $2398

  18. Easy there, or this might go to my head...

    In terms of the forward points, that's just the arb-free difference between a spot currency price and a futures price. In the real, messy, institutional world, every arbitrageur will have somewhat different costs of short-term borrowing and lending, and therefore slightly different forward points. Since there are a number of arbs, each keeping the currency futures prices fair, from their perspective, relative to spot, we end up with the futures prices we observe.

    CME itself gets the data on forward points ("user-defined", they call them) from a third party, ICAP -- see the note on the right. Also, click on "How to Use" tab at the top and go over that screen.

    In terms of linkage between spot and futures, I just googled it... here's one link:


    Seems to be easily accessible and covers both the logic / intuition and the basic formula. Have fun with it.
  19. i have to agree with 1daytrader. its rare to ask a question on elite and get such a well thought out, insightful and helpful response. for someone new to currencies (me) it woul have probably taken a year to figure all this out.

    thanks for all your help late apex.
  20. Not quite... don't forget those pesky broker's spreads, over / under the benchmark interest rates, as shown in those IB tables. You receive daily interest on your long EUR position at 2.69% - 0.5% = 2.19%. You pay daily interest on your short USD position at 4.796% + 1.5% = 6.296%.

    Also, don't forget that you receive daily interest on your available account balance at 4.796% - 0.5% = 4.296%.

    If the interest rates shown and the current EUR/USD exchange rate were all to stay the same (big ifs), you'd end up -- if I did the math correctly -- with around $325 in net interest, or $50,325 total, or 0.65% return after a year, pre-tax. If EUR/USD rate were to go up (down) X%, you'd also have a gain (loss) of exactly X% (thanks to 1:1 leverage), again, pre-tax.
  21. thanks for clearing that up apex! I missed your post about the remaining balance earning interest, now I understand.

    If nothing else changes, I'll lose about 4% by putting on the EUR/USD trade compared to just staying in dollar. But with the upcoming ECB interest hike and the end of fed's hike, along with other fundamentals pressuring the dollar, I still think long euro is very attractive.

    I'm interested in your opinion in the outlook of the dollar if you care to provide some? thanks!
  22. Many thanks for your insightful explanations, late apex, esp. that relating to arbs' modus operandi.

    The CME "How to Use" page is also helpful, particularly the "user entered forward points" part. I shouldn't have overlooked this page...

    The FEnews article is very clear indeed. Thanks for recommending it. I'll certainly reread the content during Easter.
  23. Afraid you're asking the wrong guy. I don't attempt to make long-range forecasts, beyond a few days or maybe weeks, since it doesn't help my trading results, and can be harmful. If 2006 turns out to be as bearish for the USD as the prevailing consensus seems to suggest, so be it. If not, well, it wouldn't have any impact on my daily trading plan and actions.
  24. I use TradeSports.Com once in a while.

    I believe they have a Yen Contract.

    I think the commissions are good, but volume/spread is poor on some contracts.