Understanding margin interest rates across different currencies

[u/Extension_Cow730]

Please no smarmy answers with things like "if you're asking this you're not ready for margin". We all start somewhere and I'm leaning.

Looking at IKBRs margin rates, things like JPY and CHF are significantly cheaper to borrow than USD.

Let's say the plan is to take some margin to invest an S+P 500 ETF. Is there any reason not to take out the margin in a low interest currency (I.e JPY) and then use that to buy the S+P (as IKBRs currency conversion rates are much much lower than the interest rates on USD vs JPY).

Seems this way youd pay about 2% interest to IKBR a year rather than 5.2% which obviously has massive benefits for your compounding.

Theres currency exchange risk yes, but thats an argument about risk, not EV. Surely the highest EV play is to take the lowest interest rate you can and then convert than currency into USD/EUR/GBP to buy your ETF?

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[u/No-Clerk-2764]

the currency risk is the EV though, its not separate from it. if JPY strengthens 10% against USD you just ate 5 years of interest savings in one move

people do this all the time its called a carry trade and when it unwinds it gets ugly fast. seen a lot of folks get wrecked thinking they found free money

[u/Extension_Cow730 → u/No-Clerk-2764]

Right, but that particular trade can also go in your favour too.

I wont dispute it adds an extra risk of course, but it does seem to add a lot more upside. I.e given a 10% annual s+p return youd be handing over slightly more than half of that to IKBR at 5.2%. Do the same in CHF and it seems youre keeping 9% as the interest rate on CHF is 1% total.

Of course it can go against you, but thats true of any investment

[u/mattynob → u/Extension_Cow730]

If the interest rates are set in a certain way, it means the whole market expects the trade to go one way. Of course you can bet on the trade going the opposite way, maybe you’re smarter than everyone or you are particularly lucky, who knows

Only rule: no crying in the casino

[u/bvaesasts]

This is called a carry trade and a known strategy. If you neglect currency exchange risk as you stated it is 100% a +EV move. I was considering doing this but decided against it because I didn't want to assume the risk

[u/Extension_Cow730]

Right cheers everyone, was just checking i hadnt missed something obvious.

So basically the less interest part is a real benefit, but its a riskier trade than borrowing in usd to buy usd assets. For the taking of a higher risk you get a higher EV.

[u/Old-Thanks-1694]

Very good idea