Can someone please tell me why this wont work.

Deposit 100k USD in a high interest savings account, e.g. India @ 8% for 1 year.. Then short INR/USD in a forex trading account.

I would assume, you will break even on any movements in the currency? and at the end of the year be up 8% minus fess regardless.

How can you lose money?


Thanks.

Suppose inflation in India is 15%, you lose money there. If the IND/USD rises in value or stays the same you lose there.

thanks for the reply, can you explain exactly how money is lost in each of those situations... I haven't studied finance so need this explained further (sorry if it's simple).

I deposit 100k usd in indian savings account @ 55.91= 5,591,000 inr
if indian inflation is 15% (and usd inflation is 0%)
55.91 * 0.15 = 64.3
5,591000 / 58.15 = $86,956 usd
x 8% interest..
it will be worth $93,912 usd next year
= -$6,088

so i lose money on that..

but at the same time I would of bought 100k USD/INR @ 55.91
and now be able to sell it at 64.3 = 115,006 usd

115,006 - 6,088 = $108,918

= +$8,918

interesting... I dont have currency trading exp so I wont comment

I'm pretty sure the answer is here, but I don't fully understand it yet,

http://www.investopedia.com/articles...#axzz1wH32Kf9x

"Covered Interest Rate Parity
According to covered interest rate parity, forward exchange rates should incorporate the difference in interest rates between two countries; otherwise, an arbitrage opportunity would exist. In other words, there is no interest rate advantage if an investor borrows in a low-interest rate currency to invest in a currency offering a higher interest rate.

Under the covered interest rate parity condition, the cost of hedging exchange risk negates the higher returns that would accrue from investing in a currency that offers a higher interest rate."

"After one year, the investor receives 105,000 of Currency B, of which 103,000 is used to purchase Currency A under the forward contract and repay the borrowed amount, leaving the investor to pocket the balance - 2,000 of Currency B. This transaction is known as covered interest rate arbitrage.

Market forces ensure that forward exchange rates are based on the interest rate differential between two currencies, otherwise arbitrageurs would step in to take advantage of the opportunity for arbitrage profits"

"The Bottom Line
Interest rate parity is fundamental knowledge for traders of foreign currencies. In order to fully understand the two kinds of interest rate parity, however, the trader must first grasp the basics of forward exchange rates and hedging strategies. Armed with this knowledge, the forex trader will then be able to use interest rate differentials to his or her advantage."

Ah yes. Interest rate parity. I remember now.

This is hypothetical, I don't know what the inflation rate is. The USD can also have inflation too.

Thus it would be 64.3/1.07=60.1. I think it is called a carry trade, and when Iceland or Greek banks/government fail you got no interest.

Over 30 years, I know of no currency that appreciated in real value (except gold). However, I do think there are bonds in other parts of the world that pay interest higher than bonds in the US, even though their currencies are stronger.

Gold is a commodity and not a currency for all practical purposes.

What currency is stronger than USD and has government bonds paying higher?

google interest rate parity or just look at forward currency exchange rates. No free lunch

Yes, I found that already.. but am still not exactly sure how it effects thing.

Could you create an example, or copy/paste mine and edit in how things are effected? and/or give an explanation of what it is, in your own words.


Thanks.

I really don't understand this, just read everything again, still don't see why my plan won't work.

How does a forward exchange rate come into play?

I will bet against the INR using forex exchange rates, which are all the same. This is totally separate from my indian deposit.

My indian deposit will be in INR cash. When I withdraw the cash + 8%, I can convert it to any currency at standard market exchange rates.


It doesn't matter what inflation does to the exchange rate, I will break even on that (I think, if not.. please post an example).

What does Iceland have to do with a deposit in India?

If the Indian bank failed or something.. I'd lose my money? wouldn't that also cause the INR to go down in value, in which case I'd make money on my forex investment (betting against the INR).

It's not going to work because you are going to be paying that same 8% interest when you short INR/USD. Actually your broker will charge you an extra percent if not two (because it's an exotic currency like INR). So what's going to happen is you will be getting 8% on your deposit in your bank and paying 9-10 percent on your short with your forex broker.


Try the link below and look for simular pages on that website such as interest calculation and stuff and see if you can figure it out. If it becomes too confusing (because it is) open a demo with them or any other forex broker that offers INR/USD and short 100K and you will see what I mean.

http://fxtrade.oanda.com/analysis/historical-rates

This is correct, you receive or pay interest in the forex trading account. I knew there was a reason it wouldn't work, was just waiting for someone to explain it.

Thanks.

This is correct but, some FX companies have no interest accounts which they call "Islamic Accounts" this would work on it..

Google carry trade. This is probably what you intuitively had in mind. This does work but opens you up to currency risk.