US Dollar - Bullish or Bearish!

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Topic: US Dollar - Bullish or Bearish!

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BubbleVision
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Posted: 02/Mar/2007 at 4:38pm

Om - You personally cant do it but our US Counterparts (or one's from outside India) can! Detailed reply later on inthe day

In India only Corporates can do it.

Interest is paid back in Yen Libor.

Edited by BubbleVision - 02/Mar/2007 at 4:44pm

You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!

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BubbleVision
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Posted: 02/Mar/2007 at 5:26pm

Om and Guys see a Liquidating forex Market now..

See NZD-JPY and AUD-JPY. "Carry Melting"

You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!

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omshivaya
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Posted: 02/Mar/2007 at 5:45pm

Originally posted by BubbleVision

Om and Guys see a Liquidating forex Market now..

See NZD-JPY and AUD-JPY. "Carry Melting"

Bubble ji, I would waiting for that detailed reply of yours later as you mentioned. For me, "kala akshar bhaais barabar" on what you wrote above.

I am afraid you would need to talk like a layman in forex or yen, inr, usd terms. Would really appreciate it.

Thank you verrry much.

The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

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BubbleVision
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Posted: 02/Mar/2007 at 9:51pm

Interest Rates in

Japan

are 0.50% while in other different parts of the world they are significantly more than that. In

India

it is 6.00%. So would it be possible to borrow money in Yen and bring to

India

to enjoy the higher rate of interest. Additionally if one can invest in other Assets (notably stocks and commodities) one can earn significantly more. Is this possible?

Reply: Yes this is possible. However in India currently individuals cannot take a foreign loan. Only companies can take it and they take it in from of ECB’S (External Commercial Borrowings) and FCCB’s (Foreign currency convertible borrowings). Recently L&T became the first Indian corporate to issue a Yen based bond in Japan to enjoy the low interest rates.

How this is done: Borrow in Yen and bring the money to India. These are called “Carry Trades” as these trades are done only to enjoy the interest rates differentials between currencies.

Risk: Unstable currency rates are the biggest risk to any “Carry trade”. If the carry differential is 5.5% (JPY-INR) … then the borrower would start to lose if Yen gains more than 5.5% against the Rupee. If the Yen gains 4% then the interest rate enjoyed would be reduced to just 1.5% (original 5.5% - 4% lost on currency)

Removing Risk: Yes Risk Removal from Carry-Trades is possible.

First see the trade.

Mr. A takes a Yen Loan from BOJ and brings his money to India. So on maturity of the tenor of the loan, Mr. A has to pay back the Yen. This means that Mr. A is “Short” on Yen and is “Long” on Rupee. Effectively Mr. A is “Short” in JPY-INR.

Using Forwards: For effective Risk removal Mr. A would have to Buy JPY-INR. He can buy the One year Forward of the cross. However the one year forward rate would already factor in the interest rate differential and the 1 year forward of JPY-INR would be 40 if the spot is 38. So one would NOT enjoy the interest rate differential if he tries to hedge the risk by using the forward market.

Using Options: Risk Removal is possible using various option structures like buying a Yen call Rupee Put. Yes one has to pay a small premium which eats away part of the Differential but then a lot of risk from the trade would be reduced. To reduce to premium paid on the option one can sell KO options and also KO on KO.

Other “Cheap” option strategy would be to buy a Yen Call Knock in which is currently 5% away from the current spot.

There are various other option structures which could be used for reducing the currency risk, which if I discuss here would confuse all of you. We advise corporates on hedging Forex Exposures

Please post any questions….

* 100 Yen = 38 Rupees

Edited by BubbleVision - 02/Mar/2007 at 9:55pm

You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!

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omshivaya
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Posted: 02/Mar/2007 at 11:49pm

Well, if someone has a relative or friend in Japan and he sends in Yens then? As a gift or whatever...there could be a max. limit etc. Just taking an example.

Bubble ji, can't we try to find a way out of this, some loophole something. Eve if yen rallies 4%, even then it is far better than taking a personal loan in India. This is such a great avenue...it is our duty to find a loophole. Surely, some expert can provide some answers.

If someone sends us in form of gift or anything, we can pay him 5% interest+principal and keep the returns from the money he sends. I am just trying to find out a way...expert comments needed!!!

The most important quality for an investor is temperament,not intellect.A temperament that neither derives great pleasure from being with the crowd nor against it

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basant
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Posted: 02/Mar/2007 at 6:46am

Om ji are you intending to do an open offer for Nucleus with that cash?

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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kulman
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Posted: 02/Mar/2007 at 9:26am

Yes, he seems to have a yen for controlling stake!

Life can only be understood backwards—but it must be lived forwards

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BubbleVision
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Posted: 02/Mar/2007 at 9:35am

Om - Once again ... No "Ji" please and I am no expert.

---------------

If someone recieves a Gift of a Million Yen .. then he does NOT have to pay back .. since this is a "gift". He will not have to pay interest also and hence there is NO carry involved.

There are NO loopholes (Of what i am aware of) ... Only Corporates can do an ECB or FCCB. Individuals cannot do it. Even if individuals do.. then they will have to find a "Financing" bank in Japan who is willing to lend them.

When Yen Rallies.... It does so more then 4% in 48-50 Hours. ....Look at NZD-JPY. That particular pair had the biggest carry and when the meltdown happened this week.. The NZD lost 9% in a week against the Yen and all the potential carry profits have gone out of the wind.

Historically most famous "Carry-Unwinding" happened in Aug-Oct 1998 when LTCM Failed. $-Yen fell from about 147.63 to 111.53 in these three months (Yen gained 25%) leading to only losses on those who created "Carry Trades".

The most severe fall was between 02-Oct-1998 and 09-Oct-1998 where the Yen gained 17% in a week. ... It gained 10% in 3 hours sometime during the week...showing a Liquidating FX Market.

Note this was the reaction of $-Yen... while the more popular highyeilders "Carry" like "NZD-JPY", "Aud-Jpy", and loads of other crosses... The fall was extremly large. ... Yen gained 100% against the NZD in 1997-1999 leading to "the Death of Carry" at that point of time.

This round of Carry Trades began in 2004 when the Bank Of Japan Interveined to stop Yen appreciating against the Dollar. (It was aparantly the biggest ever FX intervention worldwide). That created a floor for the $-Yen and the "Carry became the King" once again.

Note historically Carry Trades have a big fall ONLY after Fed starts rate cutting on the Dollar.. Which has NOT happened this time yet. So this latest fall in the $-Yen looks only a wobble which could recover soon.

The second biggest currency used for carry is the Swiss Franc (CHF) which also has very low interest rates. I think Sandy can use that to create a carry (if he wants) as he is based in Swiss currently.

You can't make money if you are unwilling to lose...It's like willing to breathe in but not willing to breathe out. -- ED SEYKOTA ....Read Disclaimer!

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