Just to let you know, to get some conclusion on this, I decided to do one of these synthetic trades. I had another one, but it was by accident and for a different trading plan on something entirely different. So here's where it stands, I am now long 6000 units of eur/jpy + short 6000 chf/jpy = a synth' long eur/chf. I am also short 6325 units of an actual eur/chf cross right now at the same time. Each leg is worth $.50 a pip. The position is opened with a $4 negative unrealized P&L. I am running this on a smaller account that I use to test ideas, and there isn't enough money in this test account. Anyways, I will let you all know how it has turned out.
Really quickly, I had goofed on the Eur/chf trade and had purchased over 12,000 units, I have now adjusted it to where it is $.50/pip. So include an additional $1 in the loss category.
UPDATE: Well, I've held this position now for over 12 hours (positions opened on 10/12/06 at 10:54AM CST). The results have been interesting, to say the least, but not exactly surprising. The Eur/Chf had been a range of 1.5914 to about 1.5927. The Eur/Jpy and Chf/Jpy have been in near stasis as well, though around 1PM CST, both Yens experienced a major dip. As it stands now, the Eur/Chf is nearing the lower end of the range it has been in for the past 10 hours or so. I'm not sure how to post images on here, otherwise I would be posting the positions and history. So, please allow me to simply type it up. As it stands now (1:07 AM CST), the synthetic long Eur/Chf is neither making money or losing money by any significant amount. Breaking down per leg, the long Eur/Jpy is down 4.9 pips, while the short Chf/Jpy, it is up 4 pips. The two have moved away where one was doing better than the other, but they seem to not last long. The real Eur/Chf short position is down 12 pips. The two Yens seem to cancel each other out. Quick breakdown ----------------------- long synth Eur/Chf = + .2 pips short real Eur/Chf = - 12 pips My take ----------- I have yet to see the synth "hedge" against the real position, or vice versa. If anything, Eur/Jpy and Chf/Jpy tend to move more in sync where they almost cancel each other out, better than say a trade involving Eur/Usd & Usd/Chf! I remember seeing positions where I am holding the Euro and the Swiss (both against the US Dollar), and where say the Euro would move up or down a given percentage like 1-2%, the Swiss would not reciprocate in the same fasion. I've had trades were the Swiss OR the Euro would essentially take its time while the other moved. On the interest rate front, I found something really interesting. Now I use Oanda, so these numbers reflect what they are borrowing and lending rates are at. Using their calculators (which are free) the cost of selling the Chf/Jpy is 2.05%, while the Eur/Jpy trade will get you 2.48%, the net being an interest rate of 0.43%. The Eur/Chf trade is currently costing me 1.65%, so really the trade is a net negative in the interest rate department! Not much, if you ask me. But then I ran the numbers against the margin used. The margin, being at 50:1, the Eur/Jpy trade for 6000 units the margin is $150.35. The Chf/Jpy margin requirment for $94.43. The total margin on the synth trade is $244.78. The Eur/Chf margin is 158.49. Total margin equals $403.27. Frankly, if one wanted to do a simple carry trade, you're better off avoiding the real Eur/Chf trade! Using the calculator on the synth trade, and assuming I'm correct in my figures, the interest you could collect on an annual basis against margin required, would be about 36%. After a year of collecting interesting, the synth trade would earn $86.64347, which on a margin requirement of $244.78 equals 36%. I will keep you posted on this crazy trade. Bon chance everyone on your trades!
To earn interest you need to have market exposure. Market exposure can wipe out far more than what you recieve in interest. If you are so intent on gaining interest, trade bonds, not FX.
If you want interest, don't bother trading bonds, just hold them. You can lose just as much from directional bond trading as you can with FX.
this seems.... strange.... let me explain. For illustrative purposes assume that at the moment you're making the transaction, the following conditions apply: EUR/JPY = 149.00 CHF/JPY = 93.50 EUR/CHF = 1.5900 Note that the above rates are close estimates but not exact (decided to round them for simplicity). Now to your positions. 1. Long 6000 units EUR/JPY @149.00 BUY 6000 Euros SELL 894000 Yen 2. Short 6000 units CHF/JPY @ 93.50 SELL 6000 Swiss Franks BUY 561000 Yen 3. Short 6325 EUR/CHF @ 1.5900 SELL 6325 Euros BUY 10057 Swiss Franks. So, your net position would be: Short 325 Euros Short 333000 Yen Long 4057 Swiss Franks Which means you are effectively... LONG 4057 units of CHF/JPY And SHORT 325 units of EUR/JPY which probably isn't what you expected? btw, if you notice any slight disparity, it is due to the rounding up i did.
Generally I agree, unless you're doing the carry trade. In theory, there should be no carry trade possible as the currency of the high interest country should decline vs. the currency of the low interest country but this theory is garbage. Carry with USDJPY for the past 2 years has been an unqualified success.
Yeah, it seems the market is efficient enought to ensure you'll never find a good interest arbitage opportunity in spot fx. Spread trading in futures is one thing, but another completely in FX. I found this little article that makes it more or less clearer http://www.fxwords.com/s/spread-trading-futures-vs-fx.html <b>When it comes to threadâs question - I consider the ideal carry trade the following:</b> Pick all the best carry trades (to name a few): long GBPJPY long NZDJPY long USDJPY (ok, so just basically short JPY) & long GBPCHF ain't that shabby either <b>Use that are you LT bias</b> Next look for set ups for entry opportunities. ex: Enter when market sentiment is turning ex: If the market is ranging on dailies and only enter when the interest is on your side ex: heck, if you think in the next six months the excahgne rate won't change much, then just put in a small position and earn on that heck'of'a rollover for months and hope the spot position breaks even. Lastly be wary of the attached chart - if looking for a good carry trade was a loin hunt, then an overextended market is the malaria (regarding the chart, I've used this in three different contexts this week, i'm loving it)
UPDATE: Well its been three days now, here is the rundown on this ridiculous trade. Short Chf/Jpy down 32 pips Short Eur/Chf up 32 pips Long Eur/Jpy up 13.3 pips Net positive 13.3 Dollar value up $6.51 -------------------------------------- I should say that until now, the trade has been at a loss. At one point, down $14, as the band between the Chf/Jpy & Eur/Jpy expanded. Normally, it had (from observation these past three days) traded basical +- 1-3 pips off each other. As stated by Malcolm, this is not really a proper spread trade like one would find in the futures market. The hedge isn't really a hedge, as Malcolm has pointed out, because in the end your exposure is not equally offset. I plan on closing out the trade/experiment at the end of the week.