New strategy - bipolar index carry

money tree · 20 April 2006

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.

issues:

- 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.

Nick Radge · 20 April 2006

Net market exposure is zero as we are short one index and long another.

Very wrong assumption. Very misleading comment.

You state this then go on to list 6 "issues". Those issues are in fact 6 of the 7 risks and those risks are quite complex for Joe Public.

Care to tell me the other risk?

ducati916 · 20 April 2006

money tree

I agree with Nick here in regards to your statement;

Net market exposure is zero as we are short one index and long another.

This implies an arbitrage, or a market neutral position this is simply not the case. A true market neutral would involve holding different securities upon the same underlying............Convertible Bonds Long, and Common stock Short, is an example of market neutral.

Under your issues or potential risks;

- Japan rates could rise
- NZ rates could fall

Japanese rates are going to increase, and are currently in the process of doing so under the BOJ which has been signalling it's intent quite transparently to the markets.

This will cause the N225 to outperform, as deflation has been the bear on the N225 back, inflation is very welcome in Japan. Thus you would expect the N225 to strongly outperform NZ50..........as you are coming off 20yr lows, as opposed to 5yr highs

Your 3.15% cushion could evaporate almost overnight.
There are just so many things that could go wrong with this trade.

Are you sure you're not confusing the Yen carry trade?
But that's been in operation since 1998 and is slowly drawing to a close.
Even that is not "risk free"

jog on
d998

RodC · 20 April 2006

money tree said:
while also betting

This probably sums it up.

money tree · 20 April 2006

ducati916 said:
This will cause the N225 to outperform, as deflation has been the bear on the N225 back, inflation is very welcome in Japan. Thus you would expect the N225 to strongly outperform NZ50..........as you are coming off 20yr lows, as opposed to 5yr highs

Your 3.15% cushion could evaporate almost overnight.

Like I said, go LONG the N225. When it outperforms, we PROFIT. As I said "Meanwhile Japan is inducing an asset bubble, ie its market will rise." Not sure why you repeated exactly what I said using different words in an attempt to correct me.

I didnt ask anyone to blindly enter this trade, I simply wanted others feedback. Now I see I should not bother. I stated it was a BET and that it contained numerous risks, yet some of you are insinuating I am trying to con someone.

ducati916 said:
There are just so many things that could go wrong with this trade..

as opposed to any other trade.......are they all risk-free? Nobody said it was risk-free. But it certainly carries less risk than going long the N225 unhedged. And this was the point of the post.

As for you Nick, I dont care what Joe Public knows about risk. Joe Public isnt doing the trade. I am. The other risk? That sounds like a "Im so much smarter than you and Im going to prove it" kind of comment. A little childish dont you think? There are lots of other risks.....as there are in any trade.....in fact in everyday life......oh no.....the moon might crash into the earth, better add that to the list : .
maybe earnings in NZ rise. Maybe they fall in Japan. these would impact the result.

I am aware my "net market risk" comment came out wrong. That statement was to point out that a GLOBAL market correction (for example a terrorist attack causing all markets to fall 10%) would have a minimal net effect.

money tree · 20 April 2006

RodC said:
This probably sums it up.

Quite right Rod. It does sum it up. Some people have mistaken my post as some kind of miracle risk-free strategy when I CLEARLY stated it was a BET.

bullmarket · 20 April 2006

oh dear money tree

money tree said:
..........I am aware my "net market risk" comment came out wrong. That statement was to point out that a GLOBAL market correction (for example a terrorist attack causing all markets to fall 10%) would have a minimal net effect.

I hope the course notes you're trying to give away for free now in another thread don't contain the same innacuracies that you admit to above and like the risk-free dividend stripping comment you posted the other day.

At least you admitted your suggested trades were a bet and hence you could lose just like any one could with just about any investment.

cheers

bullmarket

money tree · 20 April 2006

keep flogging that dead horse bullmarket I think theres a few people in China who dont yet know I made an error.

Why oh why didnt I think about going long the N225 years ago? How often do you get the chance to invest on margin with 2% interest?

imagine if you started this NZ50/N225 trade before the N225 took off? :swear: hindsight yeah I know.......but there are other markets with low rates......swissy maybe?

Instead of playing "lets bash MT and his dumb ideas cos its fun" why not pool our brain cells and come up with something that makes us all rich ?

bullmarket · 20 April 2006

just called it as I see it money tree

can't be any fairer than that.

cheers

bullmarket

Nick Radge · 20 April 2006

Why so defensive? After you blew $4000 on a FX system because you didn't understand the "unforseen" risks there I was just trying to point you into some other area's that you have not listed or thought of. I only put my hand up in the thread becase I know a lot about what you are discussing.

Sorry I even bothered.

Happy · 20 April 2006

Nick,
Why don't you put your hand up for MT Free Course and when/if you get it, give us your honest opinion?

money tree · 20 April 2006

yes Nick, Im sorry you bothered to be condescending also.

and then adding a cheap shot to boot (a fake one at that). For your information I made $4k using that system, not lost it (how about getting your facts straight eh?). it ended when the loophole closed.

Furthermore, if you look at the derivatives forum you may see some forex calls I made......5 big winners out of 5 calls. yet you are trying to convince us all Im a failed forex trader.
Im aware you think you have been there, seen it and done it all......I will be the first to admit you know more than me......but I bet I can still teach you a trick or two. I dont know everything and neither do you. I also reserve the right to be wrong at any time.

surely such childish behavior is not helping your cause (or anyone else)

ducati916 · 20 April 2006

money tree

Your strategy has 2 components.
#1.....You want to set up an interest rate risk arbitrage. Falling NZ interest rates, and rising Japanese rates.

Do you think CFD's are the correct security structure to capture this spread?
Two points; #1....the interest rates are on the Bond market, #2, you are buying/selling CFD's on the COMMON STOCK INDICES.

Your 3.5% spread is paid on holding long/short positions on CFD's.
Are you sure you will receive Bond interest on holding common stock index positions?

You seem to be assuming that NZ interest rates will fall. That is generally assumed to be bullish for equity, thus you may find NZ50 rising further on falling bond rates.

The BOJ may raise rates too aggresively, thus snuffing out their inflation, and returning to a deflation, which would be bearish for stocks in theory.

The overall point is simply this; when setting up a hedge, you are trying or should be trying to set up a market neutral strategy, the more highly correlated the better.

What you seem to have are two separate, directional trades.
Thus far from limiting your exposure or risk, you seem to be increasing it.
That would be fine, except that you seem a little vague in delineating the risks.

jog on
d998

money tree · 20 April 2006

at last, some constructive comments.

yes i think CFDs do an adequate job. Im not happy with losing 2% on each side, but what alternative is there?

yes, CFDs do pay bond rates (central bank rates actually) less 2%

I suspect NZ rates may fall due to economic weakness, the market prices this in well before its official.

I very much doubt the BOJ will be aggressive. They have fallen back into recession too many times. If anything I think they will be too slow and we will see a bubble like the 80's/ 90's.

Time will tell whether this trade succeeds or not.

chops_a_must · 29 September 2008

Lolza.

Random searches come up with some good stuff.

New strategy - bipolar index carry

money tree

Nick Radge

ducati916

RodC

money tree

money tree

bullmarket

money tree

bullmarket

Nick Radge

Happy

money tree

ducati916

money tree

chops_a_must

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