Hong Kong Dollar

[money tree]

The HKD has been pegged to the USD for the last 12 years.

Currently there is an interest rate arbitrage.

long USD positions pay 4.825% (oanda)
short HKD positions cost 3.9%

USDHKD net = 0.925% positive carry

risks?

USD rates might fall (tho they will probably rise, making this even better)
HKD rates might rise (we can exit position if so.....no big deal)
HKD may unpeg (there would be some warning)
AUDUSD currency risk
market risk?.....minor if any.....

bonus - USDHKD spread is the tightest Ive ever seen. spread of 4 with price of 7.7706. compared to euro (1.5 with oanda) its about 0.7.

Im thinking of setting up the following:

buy $2.094m USDHKD
margin = U$41,881 ($56,216 AU)
carry interest = U$19,370 ($26,000 AU)
margin interest = $2,950 AU
total = $28,950 p.a ($579 wk)

margin call?

there would need to be a 1% fall to trigger a margin call. this translates to a figure of 7.6929. considering the low for the past 2 years is 7.7500, we can consider this BLOODY unlikely.

lets say 6 months go by and the HKD unpegs. our margin call is triggered @ 7.6929.

we collected $14,475 in interest.
we lost 1% on U$2.094m ($2.81m AU) = $28,107
net loss = $13,632

instead, lets say 12 months go by and the HKD unpegs. our margin call is triggered @ 7.6929.

we collected $28,950 in interest.
we lost 1% on U$2.094m ($2.81m AU) = $28,107
net profit = $843

so this means that after around 50 weeks, a loss is impossible.

if USD rates rise, this may reduce to 39 weeks.

with a tight spread and low risk, maybe this is a good place to park cash on weekends & holidays? or when not in use?

thoughts?