ok, so basically you carry a long or short position in xxx/xxx that brings in interest? For 82 days? Or you enter and exit everday? Seems like if you just held it, it would be like a buy and hold strategy, subject to lots of directional risk? are you hedged? or do you only enter on certain setups, and exit every day/week? just trying to understand what it is you are talking about.
You can hedge it...or take out TPs....or average down..... You can introduce long term holds to the basket with your failed scalp trades, as you have nothing to to lose, actually you only have interest to gain if you limit your scans to interest postive pair only... Michael B.
illiquid... You have been patient with me and have tried to guide me...I know...You seem to get my attention... but I have removed the fear with the knowledge that the carry is there for me, if i fail ... I do take losses too, but only when I must... to control exposure...1/3 of the profit is interest earned and 2/3rd is from trades. Flow in fact far exceeds the interest earned...You are correct. 9but I have never disagreed with you on this...remember the gamblers anonymous thread) Michael B. P.S. I could not post to you, as you now realize that I was testing what you were explaining even before you were teaching me... P.P.S. I am testing some other good stuff just now too, but if I told you I would have to kill you...
I have little knowledge about forex trading. But have you guys ever done a correlation study of currency pair vs. another currency pair? (e.g. What is the correlation of USD/EUR to CAD/JPY). Say, if the Dollar appreciates 10% in value against the Euro, then the Cad. Dollar will appreciate 10% in value against the Yen, too.
I have done extensive studies... take a look at EUR/USD and USD/CHF for example... there are three observations to make with the various pairs: Correlation Anti-correlation Non-correlation Remember the construction of a pair. If you go long the USD/CHF ...what you are doing is to go long the USD and short the CHF There are also triangualr ways to achieve a synthetic exposure too. Example...Long GBP/USD + Long EUR/GBP = EUR/USD Michael B.
I think I just came up with a similar arb. technique as yours Mike, I think. The problem is, of course, directional risk. I believe that if you study the correlation of currency pairs, you can hedge against directional risk. I jsut thought of a way to double the yield that people normally get from arbitraging interest rate. For example: If I borrow $1 USD and pay 5% interest. The Yen is currently paying 10% interest. So I convert the Dollar to the Yen to make 10%. Let's assume exchange rate is unchanged, when I later convert the Yen back to USD, I pay 5% interest on the loan and pocket 5% interest as pure profit. This is the traditionally way it is done, as taught in business school. Using the above example, my method can achieve doubled the interest earning. After paying the interest on the loan, I end up with 10% interest earning, not 5% like the example above. Of course, I am still borrowing $1 USD at 5%. Let's factor in directional risk of exchange rate. If the Yen appreciates in value against the USD at the time when you are converting Yen back to USD, then you pocket this extra profit in additional to the 5% interest earning. If the Yen depreciates in value against the USD, then you have up to the 5% interest earning as a layer of protection. This 5% protection applies to my method, too. (yes, i do make 10%, but in terms of per currency unit , it's still 5% protection) So, if I can come up with a way to hedge against directional risk, I can achieve double the traditional interest earning from this arbitrage. Nevertheless, for those who do this sort of interest arb., they have a slight edge. Statistically speaking, there's a 50% chance the exchange rate of the Yen will either appreciate or depreciate in value against the USD. In other word, there's a equal chance you will make money or lose money from a rate fluctuation. However, an interest arbitrager has 5% of interest earning as protection. From a mathematical perspective, over the long run, an interest arbitrager should be profitable. This is like someone paying you, say, $10 to gamble with him/her where the probablility of winning or losing is a coin flip (50-50 chance). You may win, or you may lose, but you get $10 in advance just to play. Wow!
I have a theory.... There is a reason why my marketmaker has chosen the 33 pair they offer...there are literally hundreds of pairs I understand... I believe my Marketmaker trades them as one instrument and this helps them evaluate their exposure and the hedge THEY put on to protect them from WE the traders...My markemaker claims he does not trade against us, but hedges risk... My proof is this. The last three pair that were introduced were a triangualr set. Michael B.
I am aware of the triangular synthetic method. But until now, I didn't process it into the equation. Let me work it out later today, if I have the time. We can discuss it further tomorrow. I think most of the big financial institutions are doing interest arb. They'd be crazy not to, especially, when their borrow cost is so low. When interest arb. is complement with expert technical and fundamental analysis, wow, there's an huge edge. I am going to leave you with one last issue for today. There's more than just directional risk in interest arbitrage, you know. Let's say the Yuan is paying 20% interest. In order to get that interest income, you would have to convert your currency into the Yuan and DEPOSIT it in a financial institution in China. What if China has a weak and unstable financial system, and that a financial institution is likely to go out of business any time. You may not even get your deposit back. So, if you're doing this sort of thing for a while, how to do make hedge against this risk?