Foreign Exchange

How to gain exposure to foreign currencies

Interactive Brokers

The interest rate spreads narrow as you borrow more. Each currency is in its own account. The use a tiered system. A less than 10K USD equivalent account provides 0% interest, 10K-100K provides BM overnight - 0.5%, 100K+ provides BM-0.25%. These rates are for major currencies. The rates are different for the smaller currencies.

As for borrowing, less than 100K is BM+1.5%, over 100K-1M is BM+1%, 1M+ is BM+0.5%

For very small positions, Interactive Brokers will not give you any interest.

Accrued daily, paid monthly.

I do small transfers for friend and family between AUD and GBP.

The money will disappear for a couple of days while I transact. The cost from moving AUD to GBP is 2.50 USD, while the cost of moving GBP to AUD is 2.50 USD + 10 AUD (as HSBC is charging me for making a SWIFT deposit).

Exchange Traded ETFs

CurrencyShares lists shares that represent foreign currencies price in USD on the NYSE. The expense ratio is 0.4%

Interest rate is based on LIBOR

Currency Ticker Interest Rate below BM Expense Ratio
AUD FXA -0.55% -0.40%
GBP FXB -0.41% -0.40%
CAD FXC -0.51% -0.40%
EUR FXE -0.28% -0.40%
JPY FXY -0.32% -0.40%
MXN FXM -2.21% -0.40%
SEK FXS -0.77% -0.40%
CHF FXF -0.53% -0.40%

"Interest Rate below BM" is the interest rate paid below benchmark overnight rates on 2008-07-13.

The cost of borrowing USD to buy these shares is not taken into account.

Accrued daily, paid monthly.

CNY is Chinese Renminbi and issued by MS under the Market Vectors product. The expense ratio on these is 0.55%

INR is Indian Rupee, another by Market Vectors with 0.55% expense ratio..

IGMarkets

IGMarkets will take off 2% the interest rate differential between the 'central market rates'. I'm not sure if central market rate means LIBOR or central bank rates.

OANDA

Oanda is a forex trading broker. Withdrawing funds costs ?10 or AUD 20 or USD 20 or EUR 20. The interest rates are good though.

Carry trade

A carry trade involves buying a high yielding currency (e.g. AUD) and selling a low yielding currency (e.g. JPY). In the AUD.JPY example, AUD is the investing currency and JPY is the funding currency.

I'm unsure about the tax consequences of this (paying interest) so have not done this.

HKD - Hong Kong Dollar

USD.HKD is pegged between 7.75 and 7.85.

CNH - offshore Renminbi

2012-12-02

Renminbi, RMB, is the name of the China's currency. A unit is a yuan. There are separate markets when trading this currency. CNY is for trading onshore (mainland) China, while CNH is for offshore (e.g. in Hong Kong). This is due to market restrictions, is not freely traded, so there can be some discrepancy between CNY and CNH exchange rates.

I'm not sure how to check if there is a discrepancy.

Currency pair ordering

Prices are quoted with 2 currencies. EURUSD is a price for exchanging EUR and USD. EUR is considered the base currency. USD is the quote currency. If the price is 1.30, then 1 EUR is worth 1.30 USD.

It is standard for pairs to be named in a specific order.

The order is EUR, GBP, AUD, NZD, USD, (SGD, CAD), (CHF, HKD, MXN, SEK), CNH, JPY