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interest hedge strategy - futures and forex

  • Post #1
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  • First Post: Aug 6, 2007 2:21am Aug 6, 2007 2:21am
For the people very excited to prove wrong on what i'm about to write, go for it that's what i'm looking for, theres about a 1% chance of this being a viable strategy but I figured i'd give it a shot.

Now from what i've been told currency futures don't pay/charge interest (thing #1 I could be wrong about)...Now I don't trade futures but from viewing some charts I found that the movements on futures pairs compared to spot pairs are identical (thing #2 I could be wrong about)...So rather then open up a shady "sharia" account which will immediately shut you down, why dont we hedge our trades with a futures account? Ex: Long GBP/JPY in our interest paying account, and Short GBP/JPY in our futures account to offset the profit/loss and collect the interest.

My Question : I know this is a much discussed topic with non-interest paying accounts or sharia accounts, but I want to know if it is possible to do this with a futures trading account.
  • Post #2
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  • Edited 2:31am Aug 6, 2007 2:30am | Edited 2:31am
Quoting mestx41
For the people very excited to prove wrong on what i'm about to write, go for it that's what i'm looking for, theres about a 1% chance of this being a viable strategy but I figured i'd give it a shot.

Now from what i've been told currency futures don't pay/charge interest (thing #1 I could be wrong about)...Now I don't trade futures but from viewing some charts I found that the movements on futures pairs compared to spot pairs are identical (thing #2 I could be wrong about)...So rather then open up a shady "sharia" account which will immediately shut you down, why dont we hedge our trades with a futures account? Ex: Long GBP/JPY in our interest paying account, and Short GBP/JPY in our futures account to offset the profit/loss and collect the interest.

My Question : I know this is a much discussed topic with non-interest paying accounts or sharia accounts, but I want to know if it is possible to do this with a futures trading account.
The thing to consider is Spot is Todays "price" and Futures is in the future....Though they may move "close" I doubt they move in tandem.....but remember the spreads invovled in Spot, and the spread ( while small ) plus the commission in Futures.....I'd always keep an eye on the nearest expiry month.
Proper Prior Planning Prevents Piss Poor Performance
It's a good strategy and many people do this. But i should say that the price don't move EXACTELY (spelling wrong i know) the same, but you sure can make profit from this
No Brain, no Gain.
Have a look at the futures price and the spot price. You'll notice there's a difference in the prices; this gap is the interest rate differential, ie. the interest you receive on your spot trade should exactly (barring tiny mis-pricings) by off-set by the premium (this is why futures don't pay interest) of the futures contract, which will move to zero by expiry.
I'm pretty sure in futures there are no pairs just single currencies, you can be long yen, short yen or long gbp short gbp but not short gbp/jpy long gbp/jpy, that is the spot market. Could be wrong
I think the cost to hold open a futures contract is pretty high. And you are not an idoit. Thanks for trying
i read from one of ff's members that he used this strategy, but instead of futures contracts, he said he used a broker that dind't charged interest rate. What i remember is that he said he didn't use it anymore, and that he had to periodicly wire money from one account to another.
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
What Faure said is exactly right. Over the course of a contract period for futures, the % change will be a couple of %s off from spot. I will show you with some basic charts.

The first chart is the futures contract for Japanese Yen. Although there are currency pairs in futures, they typically have low volume so it is better to trade (from what I assume) to trade the single currencies. The first chart is YEN/USD in futures, not USD/JPY(YEN).

1: http://charts.barchart.com/chart.asp...XSTKIC&org=stk

This next chart is the USD/JPY in forex over the same time period.

2: http://charts.barchart.com/chart.asp...XSTKIC&org=stk

You will notice the big bummer, futures is 3% down (the one you would short), while forex is only 1% up (the one you would long). So over the course of this time range, you are up 1% on your spot and down 3% on your futures. It makes up for the interest difference.

If you wanted to get creative and a bit more risky you could try and use CAD/JPY and Crude Oil for a hedge?

Crude: http://charts.barchart.com/chart.asp...XSTKIC&org=stk

CAD/JPY: http://charts.barchart.com/chart.asp...XSTKIC&org=stk
The market is my nation. Traders, my family. Hello, brothers and sisters!
Quoting StockKJay
What Faure said is exactly right. Over the course of a contract period for futures, the % change will be a couple of %s off from spot. I will show you with some basic charts.

The first chart is the futures contract for Japanese Yen. Although there are currency pairs in futures, they typically have low volume so it is better to trade (from what I assume) to trade the single currencies. The first chart is YEN/USD in futures, not USD/JPY(YEN).

1: http://charts.barchart.com/chart.asp...XSTKIC&org=stk

This next chart is the USD/JPY in forex over the same time period.

2: http://charts.barchart.com/chart.asp...XSTKIC&org=stk

You will notice the big bummer, futures is 3% down (the one you would short), while forex is only 1% up (the one you would long). So over the course of this time range, you are up 1% on your spot and down 3% on your futures. It makes up for the interest difference.

If you wanted to get creative and a bit more risky you could try and use CAD/JPY and Crude Oil for a hedge?

Crude: http://charts.barchart.com/chart.asp...XSTKIC&org=stk

CAD/JPY: http://charts.barchart.com/chart.asp...XSTKIC&org=stk
Thanks alot Stockkjay for the detailed response. I see the difference you are talking about and have done some research of my own..I noticed that while the percentage difference is there, it remains close to the same as price moves (ex: if it is a 3% difference now it will be close to a 3% difference in the future). So (using your example with the USD/JPY) would it be possible to cut our futures account by 3 and produce almost no profit/loss or at least not enough to eat into the interest profit?
anyone?
Quoting faure
Have a look at the futures price and the spot price. You'll notice there's a difference in the prices; this gap is the interest rate differential, ie. the interest you receive on your spot trade should exactly (barring tiny mis-pricings) by off-set by the premium (this is why futures don't pay interest) of the futures contract, which will move to zero by expiry.
here's your answer mestx41

btw, dont hesitate to try this strategy, its a good exercise. i figured this stuff out by trying it, there no harm really, just keep the amounts small. every forex trader should know how to trade futures, that in itself is a good reason to try your idea.
Relax and be happy.
Quoting elskid
I think the cost to hold open a futures contract is pretty high.
Some brokers may charge an overnight holding fee, but many do not. For the ones that don't, there's no cost of holding a futures contract itself, and the IRD is embedded in the price (which is often more favorable than the IRD on a spot position, as brokers usually pad their interest rates). The pros ("true" IRD, tax benefits) and the cons (no crosses, 5-6pm EST daily blackout, limited liquidity in the non-majors) are effectively a wash. I trade both.
Thanks for the response guys..I think I will give it a try, I'll use demo's on it for now (anyone know if futures companies have demo's?)..work out the formulas to see the ratio of which i'll have to invest in each one, and let you guys know how it goes =]. If I can get it to work, i'll put some bigger money into it. I already run about 3 strategies to make a living and don't have the time to watch any more charts, so if this works it will be great because no analysis will be involved..hey if this works it's free money.
Quoting mestx41
hey if this works it's free money.
I'll save you the time, it absolutely won't work. There is no free lunch. Learn more about forward points and you'll understand how the futures are priced. All the major players in the market have automated systems which take advantage of any spot/future arbitrage scenarios in a millisecond.
Look at this thread and how people came together and helped the poster out. This is what FF is all about.
Faure answered the question very well then KGB came in with some in depth stuff.
Kevin get over to my new thread on Correl trading EURUSD USDCHF.
http://www.forexfactory.com/showthread.php?t=41751
We need to put some effort into this again.

I will say one thing about swap. You can focus on making 1-2 pips a day on swap or you can scalp 2 pips a day and get in and out of the market in 2 minutes to reduce your exposure.
It really is that easy.
Quoting Trader KGB
I'll save you the time, it absolutely won't work. There is no free lunch. Learn more about forward points and you'll understand how the futures are priced. All the major players in the market have automated systems which take advantage of any spot/future arbitrage scenarios in a millisecond.
Wouldn't y'know computers are fouling things up again!
Minesweeper target: 284
Quoting Trader KGB
I'll save you the time, it absolutely won't work. There is no free lunch. Learn more about forward points and you'll understand how the futures are priced. All the major players in the market have automated systems which take advantage of any spot/future arbitrage scenarios in a millisecond.
Well this isn't neccisarily arbitrage, well it is but not in the traditional sense...it's far from trading miliseconds, I have been testing and it is feasable except for one issue..money transfer. In order to eliminate the differences in percent change you have to withdraw and inject funds between accounts almost daily. So if there was a platform where you can trade spot and futures in the same place then I think it can easily be done. By the way thanks everyone for contributing it's very much appreciated.
Quoting mestx41
So if there was a platform where you can trade spot and futures in the same place then I think it can easily be done.
InteractiveBrokers offers both from the same platform.
Oooo... I luv outside the box stuff.

I wonder, with a little math involved, you could calculate the number of days you would be required to hold the position to Double the Premium of an Offset Option Premium?
saxobank allows FX and Futures trading from the same account .
( non US only )
This at least will avoid the need to transfer funds between different accts.
Remember that a Futures point = $12.50 while a pip = $8.50 .
( figuring to trade yen and franc only )
It's doable, but you have to look for extremes in the spread to get your ratio right.
Trading Futures is very cheap exclusive of the margin.
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