Ive made a table detailing the transactions that would occur if you started out with 10000 units long AUD/JPY in a us based account and held it for 1 year reinvesting the interest paid on the cash in the account and the interest earned on the currency pair. You would have to start out with $1000 USD and purchase 10000 units AUD/JPY long. I was originally considering an arbitrage situation but thought it wouild be simpler to just continuously build a cushion into the account.
The thought being that you never close the trade. You treat it as though it were a bond and just collect the interest payments even if the actual trade was losing money. Every interest payment you get is reinvested @30% once a week in the currency pair at whatever price it may be at. The remaining 70% is held as cash in the account. The idea here being that with each interest payment you are maintaining around 11% equity in the account. However you are slowly building up the amount of pips the account can go south before it hits a margin call. As well as building account equity.
The risks I see are that of a margin call. With the initial deposit of 1000 you would have to see a decline in price of 1000 pips to get a margin call. Each week the number of pips required for a Margin call would increase until finally after 1 yr it would require a drop in price of 1993 pips to recieve a margin call.
Furthermore, there is risk that the currency pairs interest differentials may change to a negative side.
how volitile are the interest rates in question?
I checked the historical information for the last 5 years. The curency price has never declined in an 18 month period, yet rather been on a steady increase.
I calculate a return on equity of 117% if the currency pairs stay exactly where they were purchased.
where are the flaws in this strategy?
this would be on Oanda and units are 1 dollar AUD
The thought being that you never close the trade. You treat it as though it were a bond and just collect the interest payments even if the actual trade was losing money. Every interest payment you get is reinvested @30% once a week in the currency pair at whatever price it may be at. The remaining 70% is held as cash in the account. The idea here being that with each interest payment you are maintaining around 11% equity in the account. However you are slowly building up the amount of pips the account can go south before it hits a margin call. As well as building account equity.
The risks I see are that of a margin call. With the initial deposit of 1000 you would have to see a decline in price of 1000 pips to get a margin call. Each week the number of pips required for a Margin call would increase until finally after 1 yr it would require a drop in price of 1993 pips to recieve a margin call.
Furthermore, there is risk that the currency pairs interest differentials may change to a negative side.
how volitile are the interest rates in question?
I checked the historical information for the last 5 years. The curency price has never declined in an 18 month period, yet rather been on a steady increase.
I calculate a return on equity of 117% if the currency pairs stay exactly where they were purchased.
where are the flaws in this strategy?
this would be on Oanda and units are 1 dollar AUD
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