Comments on: Understanding currency ETCs http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: anonymous http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/comment-page-1/#comment-9291 Sat, 28 Nov 2009 15:00:09 +0000 http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/#comment-9291 Well, it took some courage to use that “almost impossible” link to your own 2007 posting. Shorting yen would have worked out real well (not!) for a retail investor (03/21/07: 117.59; today: 86.38), not to mention the absolutely priceless quote about “a much lower-risk investment like an AAA-rated tranche of a CDO”.

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By: nivedita http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/comment-page-1/#comment-9222 Thu, 26 Nov 2009 22:14:36 +0000 http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/#comment-9222 It’s amusing how little financial bloggers seem to know about what they’re blogging about :)There’s nothing particularly complicated about how this works, it’s pretty much how every commodity index and ETF works, for example, except those roll as less frequent intervals than daily, because of the nature of that market.Iza, it’s not “obvious” that commodity markets are in contango, it’s the same principle there, it depends on whether the convenience yield of the commodity is higher than the cost of money in the funding currency or not.The whole point of the currency “carry trade”, is that there is a benefit rolling a long AUD/short USD position forward, so it’s hard to see how someone would get confused into thinking its a cost..Mitch, good explanation, just one point I would add on the bid/ask for clarity, once the units have been issued and the initial position has been put on, the day on day roll incurs a much smaller transaction cost than the initial position. The larger bid/ask would again be paid upon unwinding the position and redeeming units. So there’s a maybe 3bp total cost involved in entering/exiting, and then a small daily cost for rolling. The 3bp cost is paid by Morgan Stanley (and is presumably recovered by them as part of the 39bp the investor is paying).

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By: Mitch http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/comment-page-1/#comment-8844 Tue, 17 Nov 2009 20:07:19 +0000 http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/#comment-8844 Here’s how this works (ignoring the bid/ask spread, which is a non-trivial 3 pips wide):Looking at my Bloomberg screen (FRD), AUDUSD is currently trading .9285 @ .9288 (let’s call it .9286) with 1 day points of -0.87 @ -0.80 (let’s call them -0.85). The points are not based on just Australian rates; they are based on the difference between US rates and Australian rates.Here’s a long Aussie trade:Buy the index for settle in Spot + 1; this will cost the spot offer (simplified to .9286) + forward points (-.85) for an all-in rate of .928515 ($10,000 US will net you 10,769.89 Aussies).Let’s assume no change in the spot rate or interest rate differentials, just time decay from today until tomorrow.Sell the index for settle in spot; this will cost the spot bid (.9286) and your 10,769.89 Aussies net $10,000.92 US. That $.92 per $10,000 is your 1-day carry. If you earn $.92 per day every day (ignoring compounding), you’ll make $335.80 (which seems reasonable given 3M Australian Sovereign yields at 3.5%) before you pay $39 to the ETC in fees. Now, this obviously ignores that when you have to cross the bid/ask each day, Morgan Stanley is going to take your money, so you still need currency appreciation to make any money, but that’s how carry works with minimal transaction costs.

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By: Izabella Kaminska http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/comment-page-1/#comment-8830 Tue, 17 Nov 2009 17:43:45 +0000 http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/#comment-8830 @jg — So much for second guessing myself. I am going to do some intensive reading on this subject matter this week methinks.

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By: jg http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/comment-page-1/#comment-8825 Tue, 17 Nov 2009 17:23:31 +0000 http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/#comment-8825 This is indeed quite complicated. But I’m not sure that technically, your commenter Daniel and you are saying the same thing. If you buy for Value date tom, and you sell at spot, you end up losing money on, say, an AUDUSD trade. For this to be profitable, you have to buy spot+1 (which is 3 days forward) and sell spot. Basically, if the interest rates are higher in Australia, the forward points will be negative for forward dates, but they will be positive for value dates of less than spot, i.e. today or tomorrow.A couple more points:There can be important disruptions in the swap/forward market in the G10 currencies as well. It happened last year, when banks were freaking out about counterparty risk after Lehman fell.Retail investors can in fact play the carry trade, or play foreign exchange, via structured notes. There are tons of them that can be designed, through options, to do whatever investors want. The problem here is the issue of transparency, as investors will most likely not understand the underlying option structure. And of course, counterparty risk will still exist.

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By: Izabella Kaminska http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/comment-page-1/#comment-8816 Tue, 17 Nov 2009 16:27:04 +0000 http://blogs.reuters.com/felix-salmon/2009/11/17/understanding-currency-etcs/#comment-8816 Sorry playing catch up. I see you have a reply :-)Surely you’re still only reaping the overnight rate versus your cost to roll the position over from day to day at best?Except having checked the Bloomberg data I know where I went wrong, the spot rates are cheaper going forward not more expensive (commodity head on, where you obviously compensate for the cost of money. Here we’re dealing with money)– so you earn the interest, there is no cost.Nevertheless, you’re still missing out on investing in longer-dated paper, 4.8% return in the last 5 years compares to an average 5.3% per annum interest rates in the period.But definitely worth the clarification — i did warn everyone they were complicated!

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