How can I get $4m cheaply?

[jls483]

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.

 

[Trader333]

It may be worth contacting IB about this and seeing if they are willing to allow it.


Paul

 

[jls483]

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.

 

[Trader333]

They are obviously not the cheapest for all things it would appear


Paul

 

[Hittfeld]

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

 

[Salty Gibbon]

Win the National Lottery, rob a bank or get a job playing centre forward for Manchester United.

 

[jls483]

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]

John,

IB doe's such a future. The IB symbol is GBP.

It's traded through cme and the contract specs can be found at http://www.cme.com/prd/overview_BP2451.html

IBs site tells you what the marging requirements are here http://www.interactivebrokers.com/cgi-pub/margin_amer.pl

However each contract controls £62,500 and the margin for overnight holds is something like £2000.

i.e a Leverage of around 30-1. You would need £100,000+ for such a deal.

JonnyT

 

[wysinawyg]

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]

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]

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]

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]

<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]

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]

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

wysi

 

[jls483]

Just a short note to say that the last couple of posts were written before I had the replies that appear immediately before it.

Thanks to the replies I have now decided that what I was proposing will not work. Which means there is no harm in sharing what I was investigating:

When you take a spreadbet on cable they give you a pound for every .0001 change. This is not quite the same as buying dollars and then changing them back and it was this difference I was thinking about arbitraging.

For example if GBPUSD is at 1.5, imagine that I bought one spreadbet and at the same time exchanged £15,000 into $22,500. If the exchange rate fell to 1.0 then the spreadbet would lose £5,000, but the hard cash would be worth £22,500 - a gain of £7,500 and I would have a net profit of £2,500.

If cable had risen to 2.0 then my spreadbet would have made £5,000 and my hard cash would be worth £11,250 - an overall profit of £1,250.

The secret to success regardless of the movement to cable is to exchange in hard cash exactly the same amount as the notional value of the spreadbet.

Obviously I wouldn't get rich very quickly if I was waiting for cable to rise to 2.0 or fall to 1.0 so with a bit of maths and a spreadsheet I calculated the following:

cable £ $ contracts
1.6013 2,497,999 4,000,000 156
1.5962 2,505,993 4,000,000 157
1.5911 2,513,961 4,000,000 158
1.5861 2,521,904 4,000,000 159
1.5811 2,529,822 4,000,000 160

all I had to do was buy $4m and take out the appropriate number of spreadbet contracts. Then whenever the exchange rate hit one of the values on the left, buy or sell a spreadbet contract to balance things up.

To save you doing the maths my overall balance would increase by £25 whenever there was a .005 change in the exchange rate. This happens on average 2.75 times a day and so the scheme would bring in on average £68.75 a day.

You could also add to this the fact that the spreadbet company will pay you for being long in GBPUSD, which for 158 contracts is about £94.80 so the only challenge is to find out where one can buy $4m dollars for less than £150 a day, hopefully a lot less.

As I have now found that is basically impossible and the scheme is a non-starter - so it is back to my existing scheme "Suicide Trading" - until the next idea.

 

[Trader333]

With IB you can open an account in GBP and then convert it all to USD if you so wished. I have half my account in USD and half in GBP but my base currency is GBP. The balance of my account does get affected daily by the £/$ exchange rate. If the £ goes up my buying power for Pattern Day Trading increases but if the £ goes down I end up with more GBP in my base currency. I have done this to halve the effect of exchange rates which it has so far done.

So there is no need to open an account in USD

Cheers


Paul

 

[jls483]

A small summary of the scheme if it was of interest to anyone:

£2.5m of notional GBPUSD spreadbets and £2.5m of dollars can produce a "guaranteed positive" return of approximately £17,188 a year.

With deal4free both the spreadbet and the real exchange would have a margin of about £25k and if you add in a little float you will need about £75k to get your return of £17k - which gives a return of about 22% a year.

This would be the exact return if the long and short positions were financed at exactly the same rate, however the long position is rate+2.5% and the short position is rate-1.5% on the full £2.5m. This works out as a 4% of £2.5m which is £100k a year and a net loss of 83k a year and is why my "Millionaire IV" scheme has been assigned to the scrap heap.

John.

 

[ColinRiche]

What about if you bought a quarterly bet with cmc with a 10 tick spread and sold the Rolling Cash with a 5 tick spread

If my figures are correct at £167 a tick each

You would pay no financing on the Long position just the extra in the spread for cost of carry.

And you would recieve overnight financing for the Short Position

How does that equate ?

 

[Trader333]

Isnt what you are attempting effectively arbitraging ? and if so how long do you think D4F will permit it before implementing something that prevents it. Particularly in view of posting it on a public board ?

If not then I aplogise but if you had found something that worked I wouldnt be making it quite so public.


Paul