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AUD-USD arbitrage

Discussion in 'Making Money' started by FilthyCro, Mar 6, 2010.

  1. FilthyCro

    FilthyCro Registered Member

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    Occupation:
    umemployed hobo
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    Ok guys,

    I know this has absolutely nothing to do with IM but just thought id ask.

    fact 1: in america as far as I know interest rates are extremely low

    fact 2: in australia we are the only friggin country on earth to have had 5 interest rate rises in a row

    so here comes the idea. Would it be possible for me to buy real estate in oz using someone from america to finance it?

    I know you americans call this wrapping, and I know you do it on a local scale but do you think it would work on a global scale because there is a fair difference between AUD and USD interest rates.

    Obviously the person lending me the money would make money on adding extra interest and I would save money by getting a very low rate.
     
  2. BenQs

    BenQs Regular Member

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    Why don't you just trade currencies instead? That's a common pair, all brokers have it. Or if you don't want to get involved in day to day trading, just do currency options.
     
  3. Tallen

    Tallen Newbie

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    Yeah this is called the "Carry Trade". Although you have to have lots of equity to be able to borrow enough to make it worthwhile.
    Usually just big institutions and very rich individual do it (I think)
     
  4. BenQs

    BenQs Regular Member

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    Nah, anyone can do it. You can still get decent margins at a lot of brokers. The NFA is considering substantially reducing leverage, which would make it more difficult, but even then it will still be do-able. Take you position and sit on it, and then maybe scale in every couple hundred pips or so -- Best to do this off of major support and resistance lines.
     
  5. Waterfield

    Waterfield Newbie

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    Some brokers offer suicide margin (1000:1) which you could do this with, a lot of MT4 pay you the "swap" daily through this.

    Essentially you could do this with an option / futures hedge pretty easily just locking in the 4.5%. Off the top of my head anyways.

    Phil
     
  6. herron

    herron Regular Member

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    Won't the exchange rate kill you? My maths might be wrong or I have missed the point but if you are paying off the US finance from your AUD based income, when the exchange rate drops only 5c you are worse off than with the risk of interest rates rising a couple more times.
     
  7. darkface

    darkface Senior Member

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    That depends on the change in the exchange rate. A 5c drop in an exchange rate is not a "only" the AUD is quite stable in my opinion, I have actually invested my entire EURO savings in it because I trust it more *but that's just me*. 5 cents would be a 20% change in the exchange rate and as such couldn't be considered as an "only" but well. I would say it would be a gamble for the OP but if I was him I'd take that gamble as well. I'd bet on him winning;
     
  8. spliff666

    spliff666 Newbie

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    KRudd had something to say on the matter. But I think it was more to do with non-citizens buying houses

    See article here
    Code:
    http://www.heraldsun.com.au/news/prime-minister-kevin-rudd-slams-door-on-asian-raiders/story-e6frf7jo-1225857661547
     
  9. herron

    herron Regular Member

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    The AUD has varried by 5c in the last 30 days. Back in Feb it was 85c. Go back 12months and it was 0.76c. In 10 years it has got as low as 50c. That us quite a bit of cash for a $450k loan (and that is cheap in Syndey). A home loan is not a short term investment and you cannot refinance quickly. A home loan cannot by day traded.

    The interest rate in Australia is predicted to go up by no more than another 2%. An exchange rate can and does vary by that much in just 1 day of trading.
     
  10. herron

    herron Regular Member

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    That is a little different. These foreigners are buying in cash or paying the debts off with their own currency. The OP is an Australian citizen and just wants to use foreign finance.
     
  11. Waterfield

    Waterfield Newbie

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    Just search "Yen carry trade" if you want to know the basics.

    Phil.