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Essan:
Thanks for your explanation. Would it then be wrong to assume that a long
dollar / short yen spot position would naturally appreciate over time at the
rate of that differential (all other things being equal)? Or at least be biased
that way?
Sorry if I'm boring others with this discussion. For many of you I'm sure this
is elementary.
Thanks for your patience.
-Jim
Essan Soobratty wrote:
> Jim,
>
> The (fwd) yield implied by the Sep 3yr Bond Future is around 5.29% and the
> (fwd) yield from the 10yr bond future is 5.51%. Yields that are very close
> to those in the US.
>
> "Cash-and-carry" trades (such as borrowing yen at 0.75% and investing in the
> US at 5.7% can only work if you do not cover your implied fwd currency
> position - otherwise you would have risk free cash!! You can only take
> advantage of the interest differential by not (or maybe partially) hedging
> the currency exposure.
>
> The currency fwds market already takes into account the interest rate diffs,
> hence it is more "expensive" to buy yen foward than it is to sell it spot.
>
> Hope this helps.
>
> E.
>
> Jim Hamer wrote:
>
> > Does anyone know the current rate of return on a 3 - 5 year Aussie note
> > or bond? For some reason (looking at a futures quote on a 12% bond), I
> > believe it to be above 12%. Is this accurate?
> >
> > Which brings me to my next question ... How effectively can any of these
> > interest rate differentials (between countries) be taken advantage of?
> > If I can obtain US capital at 7%, can I make money on an Aussie bond
> > paying 12% by the time I figure my costs of hedging the currency risk?
> > (assuming I do not want to hedge the interest rate risk at this time).
> >
> > Any guidance would be much appreciated.
> >
> > -Jim Hamer
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