This strategy aims to profit from the differing interest rates in countries while also betting one stockmarket against another.
By going short an index with a high interest rate, and going long another index with a low interest rate, we can profit from the net credit.
eg. NZ has a rate of 7.25%. Japan has a rate of 0.1%
- going short NZ50 index we receive 7.25% (less CFD 2% spread) giving +5.25%
- going long N225 index we pay 0.1% (plus CFD 2% spread) giving -2.1%
= net credit = +3.15%
NZ is facing a recession. This means its market is likely to fall. Meanwhile Japan is inducing an asset bubble, ie its market will rise. Net market exposure is zero as we are short one index and long another.
- effective currency risk is AUDJPY long and AUDNZD short.
- Japan rates could rise
- NZ rates could fall
- N225 could outperform NZ50
- global market crash would have no effect
- a 3.15% gap means there would be many months notice before the credit evapourates
With a net interest credit, we can actually afford for the N225 to underperform the NZ50 by 3.15% p.a.