The ultimate carry trade

Discussion in 'Trading' started by Cutten, Jul 17, 2008.

  1. Cutten

    Cutten

    Make sure you have a margin account - then either buy any Yen asset (what you would do in this case), or short cash Yen against another currency (what you would do for a conventional Yen-funded carry trade). You will automatically be given a Yen loan to the value of your purchase (or Yen sale) by IB, provided you have sufficient margin to meet it.

    Regarding the FX risk:

    1) You have your USD starting balance.
    2) Buy some Yen-denominated J-REITs
    3) Your broker gives you a margin loan in Yen to fund the purchase
    4) You now own X Yen worth of stock, and owe X Yen cash. X - X = 0. Hence you have no immediate FX exposure to the Yen rate, at the point of purchase. Your only have FX exposure to the future P&L on the position - and you can just hedge it as soon as it gets to any significant level.

    Alternatively, just buy Yen, buy the J-REIT shares, then hedge your exposure with Yen futures or forwards.
     
    #41     Jul 21, 2008
  2. Some of the J-Reits that I follow are up big today.

    8962.t (Nippon Residential) is up 6.86%

    http://www.reuters.com/finance/stocks/overview?symbol=8962.T

    8976.t (DA Office) is up 5.26%

    http://www.reuters.com/finance/stocks/overview?symbol=8976.T

    The six Japanese Reits that I follow are down 48%, 59%, 56%, 68%, 46%,and 64% respectively over the last year.

    I've been waiting 3 months for any signs of life from this sector. This might be it.

    Great thread Cutten. Glad to see some useful ideas being throw around (finally).
     
    #42     Jul 22, 2008
  3. ikkyu

    ikkyu

    Greetings from Osaka,

    This company's j-reit index shows a discount to NAV of around -8 (edit: as of early july). There is some other nice research here as well.

    http://www.stbri.co.jp/english/market/jreit/nav.html

    Man, the share prices are monstrous. Some are like 10k per share. I wish this country would get its act together and crank out some more ETFs, like a REIT ETF.

    Nice topic.

    Cheers,
    john
     
    #43     Jul 22, 2008
  4. http://uk.reuters.com/article/electionsNews/idUKMAR23787320080702
    Dalton to raise $950 million for Japan REIT, buyouts
    Wed Jul 2, 2008 11:31am BST

     
    #44     Jul 22, 2008
  5. sjfan

    sjfan

    How is it difficult to see that you have a very large FX exposure?

    Say you want to buy $100 worth of a japanese asset. Today the exchange rate is about 107.21 JPY:USD and you exchange your dollars into Yen. So you bought yourself 10,721Yen worth of assets. A year later, let's say the value of your asset doesn't change and you sell it for exactly 10,721Yen, but the exchange rate is now 110 JPY:USD, you get only $97.46 back! That's a loss of a > 3% due to FX risk.

    If you are borrowing using USD collaterals, the same logic applies; You will be responsible for the FX PnL (in the exact same way as if you are long a spot JPY:USD FX pair with a forex broker without any leverage).

    What you've described is a classic uncovered currency arbitrage with a slight twist of using a risky asset instead of a riskless asset on the JPY leg. So now you get both FX risk + market risk.... probably shouldn't really call it an arb...
     
    #45     Jul 22, 2008
  6. It's amazing to see how few here ever put on an asset/FX position pair in a non-base currency. Of course you can hedge out the FX risk completely (adjusting your position weekly/daily/hourly if necessary) and you just pay/receive the interest carry which is either negative or positive. How hard is that to understand?
     
    #46     Jul 22, 2008
  7. sjfan

    sjfan

    Or just take on a forward... but that's the point isn't it? There's FX risk unless it's hedged.

    Actually, come to think of it - how *would* you dynamically hedge it with the spot? (unless you are thinking of constructing a synthetic option, which I don't think is what you are trying to do)
     
    #47     Jul 22, 2008
  8. pbj

    pbj

    Has anyone trading on the Tokyo Stock Exchange using IB noticed that IB has set the minimum price variation for these J-REIT's at 1000 yen while that actual minimum price variation on the TSE is 100 yen? See this web page from the TSE

    http://www.tse.or.jp/english/rules/equities/dstocks/index.html

    I put in a ticket at IB for them to correct this, but so far there is no correction.
     
    #48     Jul 22, 2008
  9. vv111y

    vv111y

    I've got some questions to add too- what's the minimum lot on the TSE? Can you get odd lots on there? If so, what are the issues with that?
     
    #49     Jul 25, 2008
  10. Cutten

    I know you are not my stock analyst, but how do you find out info about Jap REITs? I read the FT and WSJ daily, and never see anything on this. Is it all in Japanese?
     
    #50     Jul 28, 2008