Of course all your broker will do is hedge it in the futures market (or interbank market) and pick up the difference.
JoeyDVivre Wrote: ------------------------------------------------------- > 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. NO! There is no way to do this with either a x-ccy swap using money market/interest rate derivatives or as noted above, in an FX swap. Why? Very simple. The price of the swap (i.e. the forward USDJPY fx rate, or in the case of the IRD, the basis you’re quoted) will nullify the earnings you may be able to make in your carry trade. Otherwise, we’d have every market participant doing this trade to their entire credit limits are blown out. Truth is that there is absolutely no way to perform the carry trade without first borrowing hard JPY from a bank and then doing something with it. Forget about the Futures: they work in the same way as the FX swaps or IRD, with only very minor modifications to the math behind them. The key thing you need to think about here with the JPY carry trade is this: you don’t want to be the one holding the bag when the party’s over. Every major investment bank and HF is in this knee deep right now (no, it’s nowhere near from over) and when the time comes to truly revalue the JPY - and it will - every one of them are going to be stampeding for the door. So not only will you need to get out of your long position in whatever it is that you buy (and this is just a guess, but my hunch is that when the JPY revalues, all assets will be highly correlated i.e. everything will be down big time) in a mighty hurry, but you’ll also need to be fast enough to get out of your short JPY trade with all your limbs. And unless you’ve got some serious pull with your broker, you’ll be the last one at the party… holding the bag! Sucks to be a small fish in a big ocean!
Sigh. I wonder if this guy learned anything about derivatives in the CFA curriculum.
Darkhelmet I suggest that you go read my post again. You can absolutely change borrowings in one currency into borrowings in another currency. That is the usual “competitive advantage” argument for currency swaps (which probably isn’t true), and you can also do it with futures, forwards, options, and then a bunch of more exotic ways. Thanks for your hints about the carry trade btw.
After reading all the posts, I understand that I can never borrow JPY like the hedge funds do. It sucks to be small and stuck as small. Now I understand why some people forms hedge funds and go thru all that legal and HR and company hassle, instead of making 40-50% on your own $1MM by yourself discreetly . The bigger you are, more chances to become much bigger. What a vicious game. But I am lovin’ it. All the way baby… Thanks again for all the input
Why can’t you do the futures thing?
JoeyDVivre Wrote: ------------------------------------------------------- > Darkhelmet I suggest that you go read my post > again. You can absolutely change borrowings in > one currency into borrowings in another currency. > That is the usual “competitive advantage” argument > for currency swaps (which probably isn’t true), > and you can also do it with futures, forwards, > options, and then a bunch of more exotic ways. > > Thanks for your hints about the carry trade btw. Thanks for the comment Joey… yes, I did pick up a thing or two about derivatives… in work, school and in this program. The competitive advantage you are referring to in a currency swap is to get a more effective rate on your foreign borrowing by crossing your liability in your domestic currency against a liability in a foreign currency; however, the real impetus for getting in to a currency swap is because you very likely have an offsetting asset or liability (as the case may be) that needs to be funded and not to ‘arbitrage’ interest rate differentials in foreign markets.
Almost certainly not. There are something north of $100 Trillion notional in currency swaps out there. There is no chance people are hedging $100 T worth of foreign currency risk.
I would think if you are small, your counterparty risk on a currency swap would be substantial and people would not want to trade with you. So, will the carry trade ever come to an end (presumably it has to at some point)? If so, what will make it happen? I guess Japanese interest rates have to get up out of the gutter, and that would mean that the Japanese economy is growing, which would probably mean that productivity is way up over there, because the working population sure isn’t getting bigger, and there are only so many hours one can work in a 24 hour day. It is kinda perverse, in a global economic way, that Japan lowers its interest rates enormously in order to try to restart Japanese business, but what happens is that everyone else takes the money to invest in places outside of Japan. I’m not saying those who do it are evil or anything, but after so many years of this, there must surely be a more sensible way to try to implement economic policy in Japan.
Privatizing postal savings is a big step toward reversing the carry trade.
Huh?
Why has the carry trade worked for so long? A big part of it is that Japan is a country where people save lots of money in silly ways, especially postal savings. Postal savings is worth > $3T and it does nothing productive nor does it try to earn a decent level of return. That’s changed since they privatized it a couple of weeks ago.
Interesting, I’d never heard of postal savings, and didn’t know it was so large in Japan. I guess not having $3T available at ridiculously low interest rates will put a dent in things.