How can I get $4m cheaply?

jls483

Active member
173 0
I would like to get hold of $4m. I'm just planning to hold it not trade it.

All I want from it is for my sterling account to go up and down as the GBPUSD exchange rate goes down and up.

So for example if $4m is worth £2.5m then if cable went to 1.0000 I would have £4m and I would gain £1.5m and if it rose to 2.0000 I would have £2m and would lose £.5m.

I looked into CMC (deal4free) and I would need a margin of 1% (which is about £25,000) and there would be an overnight financing charge of about £250 a night.

Are there any better ways to do it?

Many thanks,

John.
 

jls483

Active member
173 0
IB require a 5% margin (about £125k) and say they would charge me 5% a month which is about 125,000 a month. I found it hard to believe but I queried it and the gentleman said it was correct.

Could I achieve something similar but a heck of a lot cheaper with forex futures? I would then only need to worry about rolling them over each time the future expires.

THanks,

John.
 

Hittfeld

Well-known member
437 12
I really love this IB bashing thats going on on many boards.

Naturally IB is traditionally one of the cheapest on the market: between 1.5 % and 0.5 % above LIBOR ($) or GBP_LIBOR (£). That comes to between 1.5 and 2.5 (for small amounts) % for $ and 3.9 to 4.9 for £. Per Year, debited monthly.

But why not a proper future. Cheap, easy, liquid.


Hittfeld
 

jls483

Active member
173 0
Hitfield - nobody is bashing IB on this thread. Paul is obviously a fan and I also have an account with them. I only reported the facts as they were stated to me by IB. Admittedly they gave me wrong information - but that's not my fault.

Thank you for recommending a future. That was the point of the thread - to find the best way to do it. Any chance you could help educated me as to the economics of using a future for cable?

I'm guessing that there is a future for each quarter, but I've no idea which exchange(s) offer such a future, what the symbol is, what I need to use to look at a chart of it at advfn.com, what the pip size is, etc.

Presumabely the fact that the british base rate is higher than the US one would mean that the value of the future is weighted slightly and shifts to the true value as it reaches expirary?

Many thanks for clarification on any of these points,

John.
 

JonnyT

Senior member
2,560 22

wysinawyg

Active member
186 1
John,

The deal offered by CMC looks stonkingly cheap to me for what you are asking and I'd be amazed if anything else turned out much better.

Assuming your IB account is in £ I think it would just be a matter of buying a $ future on the CME. They have 6 contract months quoted so you could buy one nearly a year and a half out. Unfortunately I'm not quite sure what would impact the settlement price for this (interest rates?) as it is a dollar denominated dollar future. You'd get your leverage though as IB would convert your £ to $ to buy it and then convert the $ back to £ when you sold, so assuming no movement on it you'd just get the exchange rate movement. The interest cost is likely to work out at less but margin requirements are generally much higher for futures than on CMC so I'd expect you probably couldn't raise that. It is also incredibly low volume by the looks of it.

wysi
 

darrenf

Well-known member
481 3
I believe forex futures or forward rates do price in the differential between base interest rates between the currency pair you are trading.

The forward rate or future will therefore be higher or lower than the spot price to take account of this differential. (depending on which of the two currencies has the higher interest rate).

The differential will reduce over time, as the contract gets nearer to expiry. (ie closer to the spot rate).

The advantage is that there is no overnight financing cost, but this could be outweighed by the fact that the differential will decay over time.

I have not studied this in any great depth so my understanding is fairly basic. However, I think as a basic concept this is correct and hope that it helps.

PS, that's one hell of a trade you're looking to make. If you don't mind me asking, what are your plans with this? I will understand if you do not wish to go in to detail.

Cheers

Darren
 

jls483

Active member
173 0
JonnyT,

Thanks for the helpful links. If I understand it correctly I will have a small problem that the future is based at a US exchange and so each future is for a fixed number of pounds not dollars. I want to have a fixed number of dollars and for my sterling balance to vary based on the exchange rate.

To use this future I would somehow need to open a dollar account with IB, then buy X number of contracts in pounds, this will then affect my dollar balance which can be converted back to pounds again. I've not used IB for this sort of thing so I have no idea how it works yet.

I also can't find information on whether or not the price of the future is offset from the spot price to compensate for the difference in interest rates. Can anybody confirm or deny this to save me more hours of searching?

Thanks,

John.
 

jls483

Active member
173 0
JonnyT,

Ignore what I said about that each contract being a fixed number of pounds being a problem. I've just done the maths and the results are the same e.g.

40 contracts at 62,500 = £2.5m
If the exchange rate is at 1.59 then this is worth $3.975m
If the exchange rate rose to 1.595 then it would be worth $3.9875m - a difference of $12,500.

If I had physically bought $3.975m with the exchange rate at 1.59 then when it rose to 1.595 I could have sold it back for £2.492163m a difference of £7,837.

And funnily enough £7,387 = $12,500 if cable is 1.595

John.
 

wysinawyg

Active member
186 1
<i>To use this future I would somehow need to open a dollar account with IB, then buy X number of contracts in pounds, this will then affect my dollar balance which can be converted back to pounds again. I've not used IB for this sort of thing so I have no idea how it works yet.</i>

I think this is right, so the better option would be their $ future bought with your GBP account. If you look around the site it is easy to find.

<i>I also can't find information on whether or not the price of the future is offset from the spot price to compensate for the difference in interest rates. Can anybody confirm or deny this to save me more hours of searching?</i>

Prices for futures definitely include an element in relation to interest rates, called the cost of carry. Having thought about it I think I do follow the pricing on the $ future. It is currently a little over 102 at the moment and I think will settle at 100 (it is unhelpful in that they use the same description for all currency futures so refer to the spot price, but going $ to $ the spot price should be 100). Hence you pay 2. something in interest charge over the period but guarantee it will give back $100 at the expiry (which IB would then convert to £ for you at the prevailing rate).

Basically you pay just over $102 now and they promise to give you $100 in the future and you don't have to worry about interest any further.

Sounds like it would be exactly what you want and the interest rate is definitely cheaper than CMC were offering. The weakness is definitely the larger amount of margin that would be required.

wysi
 

ColinRiche

Well-known member
284 3
one small point - you said that with cmc there would be an overnight charge of £250 - well thats only if your long

but if your short there'd pay you somthing like £200 a night
 

wysinawyg

Active member
186 1
Oh, I should add that avoiding any relationship to GBP with the future should make the interest rate cheaper given current differentials.

wysi
 
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