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For the Starter

2/1/2007 8:15:19 AM

bobby

5 posts

For the Starter

I am about to receive a bonus that I can choose to take in GBP or EUR. In the next six months what the rates these currencies will follow?

2/1/2007 8:48:34 AM

BrianTran

155 posts

Re: For the Starter

Hi bobby and welcome to forexplane. Six months is very far off for anyone to determine where the rates will be. Imagine from now til next six months, the UK economy suffers from natural disasters, terrorist attacks, of Bank of England decide to lower rates? These are events that affect the rates. If the rates are boxed without outside news or factors, then I can easily make that prediction.

One thing you can do is to hedge to make sure there is no depreciation on your bonus by buying the other currency in similar value. Quite a few vacationers do this to dampen the volatility of the exchange if they plan to go to a different country with a different currency in the next few months. Hope this helps.

The sum is greater than its parts.

2/1/2007 10:25:07 AM

kaiden

10 posts

Re: For the Starter

Start with say 100,000 GBP

100,000 - base amount
Interest rate - 5%
Amount after 1 year - 105,000 GBP

Held as EUR
100,000 GBP => 150,000 EUR
Interest Rate - 3.5%
Amount after 1 year => 155,000 EUR

Now, assume two extremes of the exchange rates: 0.6500 as the low and 0.7000 as the high for year end exchange rates:

GBP Nominated Acct worth 105,000 GBP
EUR Nominated Acct worth 100,750 (low) to 108,500 (High)

Note: This is 'without' considering the fees and spreads that you'll need to pay for conversion...

So, if the EUR/GBP touches 0.7000 by the year-end, then it is better to convert otherwise deal with GBP only.

2/1/2007 10:43:09 AM

BrianTran

155 posts

Re: For the Starter

Very nice calculation, kaiden. It looks attractive in theory, that is provided the rate is locked in at .7000. No one knows if it'll be at that same rate in 6 months time. The biggest risk comes from the fluctuations of the currency more than the interest earned itself.

If you plan to take your vacation in mainland with the same amount, save that in EUR and spend it when the time comes.

Here's my worst case analysis, but remember my opinion is only 1 person, so I can be wrong and the market (the majority) will also be right. I try to be with them but an opinion is an opinion and nothing more.

Anyway, from the weekly chart, I see a descending triangle. Analysis dictates that it's probable it'll move between .6960 and .6614. You can make the best case and worst case scenario on how much you'll earn in interest compared to money lost in the rate movement. Right now price is .6614, the lower end of the range. Chances are it'll move toward .6960, that means the GBP may lose value by 346 pounds. Anything earned in GBP interest will not suffice. If you have it in the EURO you'll earn less but you'll get the strong EURO.

These are scenarios only, anything can happen, including the GBP becoming stronger and break the triangle bottom. Good luck and let us know how you decide.

The sum is greater than its parts.

2/1/2007 10:47:46 AM

charlie

5 posts

Re: For the Starter

The interest rate point is right. But if you want to trade the right way, you hedge that bet with a product called a forward. Essentially, say you borrowed like 15,000,000 Yen to buy 62,500 Pounds, well then you'd be earning roughly 4.5% on your position on interest annually, but, if the pound collapses or the Yen takes off you are screwed because when you cash out there won't be enough yen left over to cover your debt.

So what the professionals do is call up their real broker and place two trades on the Phlx or the IMM one trade is to buy a 1 year contract to buy 15 million yen and another is a 1 year contract to sell 62.5 thousand pounds. The people playing in these markets aren’t stupid and know that present value of these monies will reflect either a discount or a premium depending on interest rate yields. The best part is, these contracts move in line with the market spot price because if the prices move to far out of correlation then someone can create a "synthetic" contract based on the spot and an a time deposit.

So if you are daring/reckless enough to trade leveraged spot Forex, then do know that if you go into the futures market unlevereged you can protect your positions properly. And the best part is, you can transfer funds from your segregated futures account to your spot account in if/when you are about to get a margin call and vice versa.

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Forex Trading Strategies

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