Is this CNY futures hedge trading strategy possible? | Forex Factory

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Is this CNY futures hedge trading strategy possible?

  • #1
  • First Post: Sep 16, 2007 11:25am Sep 16, 2007 11:25am
I've had this idea for a trading strategy for about a month now, but I don't know if it will actually work. I thought I'd share it with all of you to see if you can help me out on this.

Here's the idea: Oanda currently pays out a 0.5% swap rate on short CNY positions, when a short CNY position should actually be losing 6%, which I believe is the current domestic interest rate in China. I'm not sure exactly why Oanda does this, but I feel there should be a way to exploit it.

My idea to exploit this would be to hedge a short CNY position on Oanda with a long CNY position at another broker. Both positions would be collecting positive swap while the exchange rate exposure would be effectively zero.

I'm not sure how many FX brokers allow CNY trades, so I thought the next best thing would be to hedge the Oanda position with a USDCNY future contract. I understand that the interest/swap is built into the contract with currency futures, but I don't understand how that would affect a strategy like this.

So what does everybody think? Is this strategy possible? All that's really necessary is the ability to go long CNY to eliminate exchange rate exposure and receive interest on the position.
  • #2
  • Sep 16, 2007 6:27pm Sep 16, 2007 6:27pm
Quoting mickeymickey
I've had this idea for a trading strategy for about a month now, but I don't know if it will actually work. I thought I'd share it with all of you to see if you can help me out on this.

Here's the idea: Oanda currently pays out a 0.5% swap rate on short CNY positions, when a short CNY position should actually be losing 6%, which I believe is the current domestic interest rate in China. I'm not sure exactly why Oanda does this, but I feel there should be a way to exploit it.

My idea to exploit this would be to hedge a short CNY position on Oanda with a long CNY position at another broker. Both positions would be collecting positive swap while the exchange rate exposure would be effectively zero.

I'm not sure how many FX brokers allow CNY trades, so I thought the next best thing would be to hedge the Oanda position with a USDCNY future contract. I understand that the interest/swap is built into the contract with currency futures, but I don't understand how that would affect a strategy like this.

So what does everybody think? Is this strategy possible? All that's really necessary is the ability to go long CNY to eliminate exchange rate exposure and receive interest on the position.
I am still worrying about the trading of CNY. CNY is not a floating currency. Are there any reliable brokers with CNY? PS: I am not familiar with Oanda.
  • #3
  • Sep 16, 2007 11:39pm Sep 16, 2007 11:39pm
Ummm.. dude, the -0.5000 rate is a CHARGE of 0.5% for buying CNY. If you sell CNY on any market (assuming you could find one to trade on) their going to charge you the ~6% and then you’re going to pay another 0.5% on top of that to Oanda. For the mathematically challenged, your hedge would be losing 6.5%.

In theory you could make 4.5% selling CNY at Oanda and buying it somewhere else, but no market exists for you to trade it on. There is no futures market and it's still a restricted currency, so outside of mainland China there is materially no spot either.

The only thing I could recommend would be to look at the NDF markets. You'll be getting into some seriously exotic derivative shit, but it might get you what you need...
  • #4
  • Sep 17, 2007 4:25am Sep 17, 2007 4:25am
Quoting Darkstar
Ummm.. dude, the -0.5000 rate is a CHARGE of 0.5% for buying CNY. If you sell CNY on any market (assuming you could find one to trade on) their going to charge you the ~6% and then you’re going to pay another 0.5% on top of that to Oanda. For the mathematically challenged, your hedge would be losing 6.5%.

In theory you could make 4.5% selling CNY at Oanda and buying it somewhere else, but no market exists for you to trade it on. There is no futures market and it's still a restricted currency, so outside of mainland China there is materially no spot either.
I'm sorry but you are mistaken. The -0.5 rate is the cost of borrowing CNY, but because the rate is negative you are actually receiving 0.5%, not paying it. I can confirm this because I am currently long USDCNY on Oanda and I do receive swap interest on the position. Test it out yourself if you don't believe me. A negative cost of borrowing means you're being paid to borrow the currency. Compare it to the other rates for costs of borrowing on Oanda and you'll see what I mean.

You can read more about Oanda's swap rate with CNY here:
http://www.thefinancialwhiz.com/2007...-trade-choice/

The idea is to be long USDCNY on Oanda to receive this interest and then go short USDCNY somewhere else to receive the 6% interest that matches up with the domestic rate while reducing your exchange rate exposure to zero. My hedge wouldn't be losing 6.5% because that wouldn't be a hedge, that would be having two short positions on USDCNY which isn't what I'm suggesting.

There are futures for the Chinese yuan, you can read about them here:
http://www.cme.com/trading/prd/fx/chinese.html
  • #5
  • Sep 17, 2007 5:20pm Sep 17, 2007 5:20pm
Quoting mickeymickey
I'm sorry but you are mistaken. The -0.5 rate is the cost of borrowing CNY, but because the rate is negative you are actually receiving 0.5%, not paying it. I can confirm this because I am currently long USDCNY on Oanda and I do receive swap interest on the position. Test it out yourself if you don't believe me. A negative cost of borrowing means you're being paid to borrow the currency. Compare it to the other rates for costs of borrowing on Oanda and you'll see what I mean.

You can read more about Oanda's swap rate with CNY here:
http://www.thefinancialwhiz.com/2007...-trade-choice/

The idea is to be long USDCNY on Oanda to receive this interest and then go short USDCNY somewhere else to receive the 6% interest that matches up with the domestic rate while reducing your exchange rate exposure to zero. My hedge wouldn't be losing 6.5% because that wouldn't be a hedge, that would be having two short positions on USDCNY which isn't what I'm suggesting.

There are futures for the Chinese yuan, you can read about them here:
http://www.cme.com/trading/prd/fx/chinese.html
when you long USDCNY, they will pay you interest because the interest rate of CNY is lower than USD.

For "then go short USDCNY somewhere else to receive the 6% interest", I would say no way!
  • #6
  • Sep 17, 2007 10:26pm Sep 17, 2007 10:26pm
I started a thread on USDCNY earlier

http://www.forexfactory.com/showthread.php?t=46313
  • #7
  • Last Post: Sep 17, 2007 10:42pm Sep 17, 2007 10:42pm
If you used a higher yielding pair, say GBP/JPY, theoretically this would work, if only there were no spreads.

You could go long GBP/JPY on Oanda at 17:01 ET and go short the same amount on a different broker (that does a traditional 17:00 rollover). The next day at 16:59 ET, close both positions. Collect the constant-accruing interest at Oanda 100% risk-free.

The spreads will make this a net loss scenario unfortunately, you'll pay 8 to collect 2, or something along those lines.
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