Synthetic FX Housing Loan

[Coach B]

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

 

[Stormin_Norman]

hedge your currency.

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

 

[Coach B]

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

 

[Stormin_Norman]

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

 

[Coach B]

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

 

[Stormin_Norman]

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

hedge your repayments.

 

[Coach B]

Stormin,

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

Regards


CB

 

[Stormin_Norman]

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.

 

[aleckara]

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.

 

[Coach B]

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.

My hedging issue is less about the repayments (although I agree that is an issue) and more about the capital value.

I have heard of a number of people in Singapore that have been caught with margin calls when the AUD sank from the $0.90+ mark.

CB

 

[Stormin_Norman]

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.

 

[aleckara]

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.

 

[aleckara]

The US dollar is looking like a good candidate atm.QUOTE]

My hedging issue is less about the repayments (although I agree that is an issue) and more about the capital value.

CB

You have a problem then. Most hedging derivatives hedge away any interest benefits and one party has to compensate the other for any interest rate benefits once hedged from what I remember when studying that awhile ago. Currency swaps, futures all include an interest component as part of their cost of carry. Options can be used and can hedge in one direction but have a cost that needs to be renewed adding to the servicing cost of the mortgage.

In other words normally you would just get a local loan depending on risk premiums of local loans.

 

[Coach B]

Well it looks like we can wrap up this thread.

Thanks for the input.

CB