Reply to: Free money?

[Moscow Mule]

The kind of person who does that kind of deal wouldn't be bankrupt after a £500k loss.

But would probably be quite stressed, staying up all night watching the Jap markets for any sign of movement...

[thunderlizard]

The kind of person who does that kind of deal wouldn't be bankrupt after a £500k loss.

[DimPrawn]

Every man and his dog in the city knows about this type of trade. But currency fluctuations make it very risky. You have, say, a 80% chance of making £100K over the course of the year, but 10% chance (say) of losing £500K if one of the currencies moves by 50% (this DOES happen).
Do you feel lucky, punk?

If you win, £100K for nothing. Hooray!

If you lose, £500K down, declare yourself bankrupt and walk away.

[KentPhilip]

Every man and his dog in the city knows about this type of trade. But currency fluctuations make it very risky. You have, say, a 80% chance of making £100K over the course of the year, but 10% chance (say) of losing £500K if one of the currencies moves by 50% (this DOES happen).
Do you feel lucky, punk?

[ASB]

Indeed. As is so often the case with good things financial, the press only start to write about it once all the big money has been made.

A chap I know has (some of) his mortgage in yen (and has had it so for about 10 years). In this time the yen has depreciated by about 25% eroding the principle on the debt (in sterling terms. With the interest rates paid this has worked out to be a good deal - but certainly one for the brave.

However, in the case of the chap I know he did it with zero risk. He gets a certain amount of his income in the form of royalty payments denominated in yen. What he did was to convert an amount of his mortgage such as the repayment were met by the royalty income. Free hedging and low interest rates. Neat.

[thunderlizard]

Not really- a Yen's a Yen, regardless of whose treasury it's sitting in.

[n5gooner]

If I can convince a Japanese bank to lend me £1M, the interest rate is less than 2%.

The Bank of Iceland current account pays out 14% interest.

That means I will be making £140K in interest and paying £20K in interest to the lender.

This is free money.

Can you get a Yen account with the Bank of Icland, then no currency conversion needed.

[Moscow Mule]

It does seems as though historically the OP proposition would have worked quite well over the previous 6 month.

Indeed. As is so often the case with good things financial, the press only start to write about it once all the big money has been made.

[ASB]

Those are interbank rates.

Try again with cash rates, the spread will eat about 8% of the gain, and will be worse if you convert to GBP first.

Well yes, but I would imagine I would do much better than cash rates. There would be no need for conversion to GBP first.

It does seems as though historically the OP proposition would have worked quite well over the previous 6 month.

[Moscow Mule]

and it may go on for another 6 months before all goes tits up

And it may happen tomorrow. IANAIFA but I would counsel against it.

[Moscow Mule]

well that's 16% in 6 months, on a rather risky position. seems fair.

With somebody else's money? Maybe. With mine? No way, I'm far to risk adverse to risk 100% of my capital on a 16% gain, (edit: or just 8% at retail rates).

Just think, this is the kind of ecomonics that whaling ship and harpoon manufacturers must hedge against every day.

[thunderlizard]

well that's 16% in 6 months, on a rather risky position. seems fair.

Just think, this is the kind of ecomonics that whaling ship and harpoon manufacturers must hedge against every day.

[meridian]

Those are interbank rates.

Try again with cash rates, the spread will eat about 8% of the gain, and will be worse if you convert to GBP first.

[andy]

http://www.exchange-rates.org/history/JPY/ISK/T

29/12/06 1 ISK = 1.68506 JPY
26/06/07 1 ISK = 1.96004 JPY

Seems to me borrowing JPY to buy ISK would have worked quite well over this 6 month period.

1,000,000 jpy yielded 593,450. This converts back yesterday to 1,163,187.

and it may go on for another 6 months before all goes tits up

[ASB]

http://www.exchange-rates.org/history/JPY/ISK/T

29/12/06 1 ISK = 1.68506 JPY
26/06/07 1 ISK = 1.96004 JPY

Seems to me borrowing JPY to buy ISK would have worked quite well over this 6 month period.

1,000,000 jpy yielded 593,450. This converts back yesterday to 1,163,187.