Opportunity - cash rate arbitrage

[akula]

Out of interest, what's everyone's thoughts on profiting from differences in interest rates between coutries?

For example, if you're in US, your cash rate is 0.25%, so you can probably borrow at like .5% (?)...provided that you invest in something safe..like an Australian government guaranteed term deposit which pays 6.5% p.a.

on a miserly $US1m loan that could be a riskless $62,500 profit (less tax and given the forex exposure is managed) over 12 months...way more than an average US salary...all for doing hardly anything

c'mon, let's do it, i'm in sydney. we have some of the highest paying term deposits around, and you have somne of the cheapest money in the world.

[Jake Worrall]

Hello Akula.
My name is Jake, and i am 16 years of age. Although i am too young to participate in this, i am still very intrigued, however i am not entirely sure i understand what your plan is. If you could please clarify what you mean, i would greatly appreciate it.

[ticky]

Mate, I wish it was thaaaat easy to make money. Your plan is not completely riskless as there is foreign exchange risk. You are converting one currency to the other, and then converting it back.

You need to look at the forward rate curve to see what locking in 12 months is worth. You will then realize that the curve has already adjusted for the difference in the money market rates.

haha yes I work in finance Nice attempt at an arbitrage though!

[akula]

Mate, I wish it was thaaaat easy to make money. Your plan is not completely riskless as there is foreign exchange risk. You are converting one currency to the other, and then converting it back.

You need to look at the forward rate curve to see what locking in 12 months is worth. You will then realize that the curve has already adjusted for the difference in the money market rates.

haha yes I work in finance Nice attempt at an arbitrage though!

thx for the feedback
what kind of work do you do? it's good to meet people familiar with this stuff on the forum
i totally agree with you...i think that for the major pairs, the markets are efficient enough that the cost of hedging precludes any significant opportunities in covered interest arbitrage
what are your thoughts on less efficient markets though?
for example, here's one recent study

An analysis of the efficiency of the foreign exchange market in Kenya
This study examined the Efficiency Market hypothesis in its weak form using run tests, unit root tests and the Ljung-Box Q-statistics. The main finding of this study is that the foreign exchange rate market is not efficient. The results showed that most of the rejections are due to significant patterns, trend stationar...ity and autocorrelation in foreign exchange returns.

[Fanatik]

This is an interesting concept. Although there is risk involved, as with most any transaction - so long as it's "managed" risk, I'd be interested in hearing/learning more.

[akula]

yeah...i'm interested in backing scaleable forex opportunities
...maybe some sort of a risk management product for forex users like australian exporters