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Jim,
Lets say you have a long $yen spot position which you roll over daily. In
calculating your daily pnl you will have to take into account the t/n rollover which
implicitly means you will be earning $ interest and paying yen interest on the
respective principal amounts. But of course you primary risk/gain/loss comes not
from this rollover but from the move in the spot!
Hope I'm answering your question.
E.
Jim Hamer wrote:
> 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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