I read this article about how an individual can borrow in JPY. http://www.felixsalmon.com/000752.html On the comments section, people said , sell JPY futures and it is same as borrowing JPY. I don’t understand how can it be the same. The reason I am asking is; I am trying to find a way to borrow JPY so that I can leverage it say 1:10 and invest in wherever I want. But pay only 0.75/yr on JPY. Is this possible for an individual? How do the hedge funds manage to do it? Do they actually go the Japanese banks and borrow actual JPY? Any comments will be greatly appreciated.
Although I didn’t read the article, it seems the comments are just saying that shorting JPY futures and borrowing JPY are taking the same view - that JPY will depreciate. The short futures is self-explanatory; when you borrow JPY (as a USD investor), and JPY has depreciated 6 months later, you can repay your JPY loan using less USD. Either way, you the USD investor profits from JPY depreciation. Regarding your HF question - I believe HFs often borrow JPY from their favorite European and some US banks, who have access to JPY through the overnight call market (interbank JPY borrowing).
In this case shorting JPY is not an option for me. I am trying to borrow in JPY because the interest rates are low. So the question is; is borrowing in JPY for an individual possible or not? Can an individual work with US banks to borrow in JPY through the overnight call market (interbank JPY borrowing)? Can anyone answer?
Of course an individual can’t participate in interbank lending - it’s for big players with monster resources. Borrowing US dollars and shorting yen futures contract = borrowing yen (except for taxation in which it’s worse, I guess). It’s getting a little late in the game to be doing the carry trade right?
Open an account at Interactive Brokers. They allow you to trade currencies there. You can sell yen against whatever currency you like, then invest the proceeds. But I will echo JoeyD - you are a little late to the party
I am not late to the party Party has just started. Of course, it all depends on where you look from. If I sell JPY futures and use the proceeds, 1) I am not borrowing at 0.75% which is the lucrative part 2) I can not leverage anything whereas if I can borrow in JPY, I can use it as collateral and borrow say 10 times of that amount from the bank and pay 0.75%. (here comes the USD-JPY currency exposure) Anyone knows what the minimum amount to participate in JPY interbank lending?
Given that you have no idea how to do this, do you really think it’s a good idea to be doing it? I have no idea what the minimum for interbank lending is. It wouldn’t surprise me at all to learn it’s 10, 50 or 100MM. But since it’s interbank lending, they also might require that you are, you know, a…bank, and not just some wazoo who thinks he can make money borrowing at .75% and leveraging 10X. I can, however, take comfort in the fact that if you had $10MM dollars, you’d be smart enough not to do this.
Just a thought - is it possible for individuals to enter into cross currency swaps with brokers or banks? If so, misterno could first borrow USD, then enter into a X-C swap, effectively turning it into a JPY loan for the term of the swap. Just don’t know whether this is an option for individuals.
Just get yourself a Hambros book (I see its now called the Reddbook Dealers Directory www.reddbook.com). You’ll have direct phone numbers to all of the major interbank trading desks. I suggest starting off with the New York desks of bulge-bracket investment banks, as they tend to be the most friendly and helpful. I’d say the best time to call is right after 8:30am on the first Friday of each month. They generally reserve that time for individual investors such as yourself.
misterno, if you actually read my post above, you would see that I just told you how to do it. When you sell JPY (not futures, actual yen) short in a margin account, you are essentially borrowing them from your broker. :
Tobias If I sell JPY (Shorting JPY), how is it that I have actual Japanese Yen notes in my hand? Shorting in margin account means selling something that youdo not have and eventually you have to buy it to cover it. Please explain if I am mistaken.
misterno Wrote: ------------------------------------------------------- > I am not late to the party > > Party has just started. > I don’t think you have a clue. > > Of course, it all depends on where you look from. > > If I sell JPY futures and use the proceeds, Look - anybody who thinks that you sell JPY futures and use the proceeds needs to step away from this. There are no proceeds from shorting a futures contract unless the trade goes in your direction. > > 1) I am not borrowing at 0.75% which is the > lucrative part > You can borrow yen at 0.75% but that’s not lucrative if yen appreciates at the forward rate implied by the yen futures and forwards markets. Since you don’t even know how a futures contract works, it’s very unlikely that you can predict yen better than the massive interbank and futures markets in yen. > > 2) I can not leverage anything whereas if I can > borrow in JPY, I can use it as collateral and > borrow say 10 times of that amount from the bank > and pay 0.75%. (here comes the USD-JPY currency > exposure) > No, you don’t borrow yen and use it as collateral. You borrow yen and buy stuff with it and hope to heck that yen doesn’t appreciate much > Anyone knows what the minimum amount to > participate in JPY interbank lending? It depends how much you want to do - in my old hedge fund we went from futures to Interbank with about $200M under management. Probably could have gone sooner. I’ll bet you do not know the difference between interbank yen and futures yen…
HoldSideAnalyst Wrote: ------------------------------------------------------- > Given that you have no idea how to do this, do you > really think it’s a good idea to be doing it? > > I have no idea what the minimum for interbank > lending is. It wouldn’t surprise me at all to > learn it’s 10, 50 or 100MM. But since it’s > interbank lending, they also might require that > you are, you know, a…bank, and not just some > wazoo who thinks he can make money borrowing at > .75% and leveraging 10X. I can, however, take > comfort in the fact that if you had $10MM dollars, > you’d be smart enough not to do this. You don’t have to be a bank to particpate in Interbank markets - just someone with enough money to convince your prime broker (who is a bank) to let you participate. It’s really not worth the trouble until you are so big you are getting slippage in futures contracts that is a problem or you have some special timing need (e.g., you can trade yen easily 5 or 6 years out in Interbank markets).
LIII in Tokyo Wrote: ------------------------------------------------------- > Just a thought - is it possible for individuals to > enter into cross currency swaps with brokers or > banks? If so, misterno could first borrow USD, > then enter into a X-C swap, effectively turning it > into a JPY loan for the term of the swap. Just > don’t know whether this is an option for > individuals. If you have about $50M in a margin account they will do FX swaps for you.
Here’s how it works. Suppose that I am an individual investor who thinks the carry trade is a good idea. I can’t go to Japan and fill out a loan application at a bank (unless I have some nice collateral for the loan like US treasuries and then there are different ways to do this with repo). Since I’m an American, I can only borrow in the US. I go to a bank and borrow $109,000 at the repo rate say 6% for a year. I short a Yen futures contract one year out currently with a notional size of about $109,000. In shorting a futures contract, no money changes hands except that I will have to put down margin, say $9K which earns interest less than I’d be paying on the loan but for ease let’s say it’s the same. That means that I am really paying US interest on $100,000. The yen is expected to appreciate at the implied repo rate in the forward market - essentially the difference in the bond repo rates for japanese bonds and US bonds. Let’s say that’s 5%. I can lock in that difference in the futures market which absolutely positively has to be priced that way or there is arbitrage (don’t even other to look). That means that I have exactly the same return as if I went to Japan, borrowed Yen for a year and converted into dollars. In either case, I currently have dollars and an obligation to deliver 12.5M yen in a year and the interest rate on the loan is 1%. If the yen appreciates at the implied repo rate, I have done nothing very productive here. If the yen appreciates at less than the repo rate or depreciates I make money on this trade. The only difference between the futures contract strategy and the loan strategy is that the futures contract is marked to market which means I can go broke on the trade when the yen has gone through the roof and they hit me up for more margin. At least in the loan thing, I won’t be broke until the loan is due. (There is also something about interest rates being correlated with the contract value and I am receiving floating rate interest, but that’s for a more advanced discussion). There is also a difference in taxation as gains on the futures contract are taxed at 60/40 always and the taxation of all other capital gains and losses in the trade depend on the holding period. The deductibility of the interest paid on investment loans is a mess so you would have to work out various assumptions to figure out the tax consequences.
BTW - Long term, I think the carry trade is a decent idea but very risky right now.
Thanks, Joey, this is helpful. BTW, do you know of any document or source that has a nice laymans or conceptual “derivatives arithmetic,” summary. Things like Put - stock = call Borrow x - future y/x = borrow y Etc… Before the exam, I had a lot of these down; I’m ashamed to admit I need a refresher. I can do the math provided I remember the structures, but I need to review the structures again.
Thanks JoeyDVivre That was a big help. I will re-read it and post my questions.
So I guess the basic gist with taxation is 1) Futures contracts are sec 1256 contracts which means that 60% of the gains are long-term capital gains and 40% are short-term capital gains regardless of the holding period. 2) The P/L on any foreign currency transaction to make an investment is treated as P/L on the underlying investment with the same holding period. 3) Interest is only deductible to the extent that you have gains on the investment, otherwise it is carried forward. Let’s say I take my $ and invest in CFC. So: a) Holding period = 6 months and Yen depreciates and CFC up 20%. If I borrow Yen outright at 1%, I can deduct 0.5% for interest but CFC gains and Yen depreciation are taxed at short-term capital gains rates. If I do it with futures, yen gains are taxed at 60/40 (better), all US interest (3%) is deductible (better), and I pay short-term capital gains on CFC (same). So futures way is much better. b) Holding period = 18 months and Yen depreciates and CFC up 20%. If I borrow Yen outright at 1%, I can deduct 1.5% for interest and all CFC gains and Yen depreciation are taxed at long-term capital gains rates. Further, there is no tax due on Yen appreciation until the year I mark it to market. If I do it with futures, yen gains are taxed at 60/40 (worse) and taxed in the year the are earned, all US interest (9%) is deductible (better), and I pay long-term capital gains on CFC (same). So now the US interest deductibility is probably outweighed by the poor treatment of yen gains. c) Holding period = 18 months and Yen depreciates and CFC down 15%. If I borrow Yen outright at 1%, I can deduct 1.5% for interest and CFC losses and Yen depreciation are taxed at long-term capital gains rates and netted with the usual capital gains carryforward rules. Further, there is no tax due on Yen appreciation until the year I mark it to market. I have no idea if there are wash-sale rules on currency transactions but maybe you could play games with timing your marking to market. If I do it with futures, yen gains are taxed at 60/40 (worse) and taxed in the year the are earned, all US interest (9%) is deductible but only on a carryforward basis assuming you have future gains, and I have long-term capital losses on CFC that can be carried forward. Probably the actual borrow is better here too. BTW - Any or all of that could be wrong - check with tax advisor.
If you short JPY in a brokerage account you pay margin interest based on Japanese rates (you probably won’t get 75bps, but you can definitely get something under 150bps). This will generate cash in the currency you choose, which as Joey described, you would use to buy stuff. When you decide to close your position, you will have to deliver yen, just as if you had walked into a bank in Tokyo and borrowed yen from them. misterno Wrote: ------------------------------------------------------- > Tobias > > If I sell JPY (Shorting JPY), how is it that I > have actual Japanese Yen notes in my hand? > > Shorting in margin account means selling something > that youdo not have and eventually you have to buy > it to cover it. > > Please explain if I am mistaken.