# Synthetic FX Housing Loan



## Coach B (12 January 2009)

I am a newbie to FX trading so please excuse me.

Can someone tell me how I could use FX Futures to create a synthetic FX housing loan.

For example;

Say I wanted to buy an investment property witha $AUD300k mortgage say fixed for 5 years at 7% how could I swap it to YEN at say 1%?

Also if it is possible is what are the likely costs?

What risk management strategies do you recommend?

Cheers,


CB


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## Stormin_Norman (12 January 2009)

hedge your currency.

the yen goes up 10% against the AUD and there goes your cheap loan.


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## Coach B (13 January 2009)

Thanks Stormin.

Surely it is not as clear cut as you can't do it. There has to be some creative mind out there that has figured out the hedge!

Here is one example, not perfect but a reasonable start.

http://www.multicurrencymortgages.com/

CB


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## Stormin_Norman (13 January 2009)

make sure you know what youre doing.

taking out a loan in yen youre effectively buying AUD and selling YEN.

any depreciation of the AUDJPY is a direct cost to your loan.

you might want to read this:

http://www.real-debt-elimination.co...tralia/foreign_currency_loan_Dwyer_vs_CBA.htm


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## Coach B (13 January 2009)

Thanks for the note, I was aware of the FX loan scandal with CBA in the 1980's but it is always a good reminder to read about it again.

I am not prepared to jump into something  like this with any significant risks.

The purpose of this thread is to see if anyone has solved the risk puzzle or is willing to share any techniques they are using to mitigate FX risk in order to play with an interest rate arbitrage.

Cheers


CB


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## Stormin_Norman (13 January 2009)

Coach B said:


> Thanks for the note, I was aware of the FX loan scandal with CBA in the 1980's but it is always a good reminder to read about it again.
> 
> I am not prepared to jump into something  like this with any significant risks.
> 
> ...




hedge your repayments.


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## Coach B (13 January 2009)

Stormin,

Can you give an example of how the hedging of repayments works?

Regards


CB


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## Stormin_Norman (13 January 2009)

i wouldnt be taking the loan if you have to ask that question. 

but u want to be taking out an option to sell AUD and buy YEN at the current price.

..i think that's right. hard to operate when im sleepless from overnight.


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## aleckara (13 January 2009)

Why use JPY to do the loan?

The US dollar is looking like a good candidate atm. There is a lot of predictions that the US dollar will fall. And they also have very low interest rates.

You can hedge anything, however it gets a little complicated and from my understanding affects the interest rate as well. And the hedges need to be set up in advance for each payment if I'm correct in my thinking. May be hard to do for a 25 yr mortgage. I would be interested in how you would do this using options, futures or whatever derivative contract you would like more as an academic exercise.


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## Coach B (13 January 2009)

aleckara said:


> The US dollar is looking like a good candidate atm.QUOTE]
> 
> Agree US dollar a good option if you can lock in long enough term.
> 
> ...


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## Stormin_Norman (13 January 2009)

youre dicing with a lot of factors.

i tried to tell a developer that at a bbq back in the middle of the year when he was about to finalise his 1% loan from japan. i could tell he didnt understand what i was trying to say to him.

i heard the other day he went belly up. crashed economy + crashed exchange rate took out 15 years of his work.


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## aleckara (13 January 2009)

Stormin_Norman said:


> youre dicing with a lot of factors.
> 
> i tried to tell a developer that at a bbq back in the middle of the year when he was about to finalise his 1% loan from japan. i could tell he didnt understand what i was trying to say to him.
> 
> i heard the other day he went belly up. crashed economy + crashed exchange rate took out 15 years of his work.




No matter what you do it is a highly risky strategy. The interest may be low but you are increasing the risk definitely. With a large borrowing like that you will find the risk magnifies to huge proportion (enough to clean most people out).

the famous quote "the markets can stay irrational longer than you can stay solvent" is very true of what you are trying to do.


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## aleckara (13 January 2009)

Coach B said:


> aleckara said:
> 
> 
> > The US dollar is looking like a good candidate atm.QUOTE]
> ...


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## Coach B (13 January 2009)

Well it looks like we can wrap up this thread.

Thanks for the input.

CB


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