Multicurrency Dollar Hedge

by | Sep 27, 2001 | Archives

One grave risk at this time is a US dollar crash caused by falling interest rates.

If the greenback collapses, we will see our cost ofliving rise in many ways through higher fuel costs and more expensiveimported products.

Yet where can we diversify? We have looked at the potential of Dominicanand Argentine bonds, but as attractive as these are for high returns theyalso pose higher risk.

We can use the Multicurrency Sandwich to attain more safety and a betterreturn. Here is a way to earn over 10% and still maintain a high degreeof safety.

We can use this speculative tactic in quite a safe way to hedge against adollar fall now. We can borrow Japanese yen and deposit the loan in onemonth Australian dollar, British pound, Euro and Norwegian, Swedish andDanish kroner deposits. Here are current rates offered by Jyske Bank whowill make the Japanese yen loans at 2% and below. For more on currentrates go to Jyske Bank's website.

Here are the rates as I write this message

	Australian dollar one month CD		4.00%	British pound one month CD			4.00%	Euro one month CD					3.25%	Danish kroner dollar one month CD	3.75%	Swedish kroner dollar one month CD	3.75%	Norwegian kroner one month CD		6.75%

I have a similar position now having borrowed yen at under 2% and havingthe finds deposited in Euros, Australian dollars and British pounds.Adding the Scandinavian currencies diversifies the portfolio even moreand adds a little extra return with the higher interest rates.

Over the past weeks this position has worked quite well for me. When theyen has risen, so too has the Euro. In the meantime I make the extrareturn. Here is the profit one could make. I have used an example of aUS$100,000 investment in to Euros used as collateral to borrow $400,000of yen however one can start this position with as little as US$16,000. Ihave factored in a 1% fee to set up the loan by reducing the $100,000invested to $96,000.

Amount in US$ equiv.	Investment Rate				Annual Return$96K					Euro 1 Mo. Deposit 3.25%	$3,120$80K					Australian $ 1 Mo.						Deposit 4.00%				$3,200$80K					Brit. Pound One Mo.						Dep. 4.00%					$3,200$80K					Danish kroner One Mo.						Dep. 3.75%					$3,000$80K					Swed. kroner One Mo.						Dep. 3.75%					$3,000$80K					Nwg.kroner One Mo.						Dep. 3.75%					$3,000$400K					Jap. yen loan 2.00%			$8,000									Total Return	$10,520

You could stand to make 10.52% in one of the safest non dollar positionsyou can have. The risks are 1) the yen will rise versus these investedcurrencies. This risk currently seems small to me and is counter balancedby the fact that the yen could also fall versus these currencies whichwould increase the profitability of this portfolio. However one must takethe possibility into account and not invest more than one can afford tolose.

2)by choosing the shortest term CDs is that the current rates are notlocked in. If interest rates fall even further, one may be put in aposition where the return is not as attractive and if the yen loan ratewere to rise, the entire positive carry could be lost!

My opinion is that when this risk is balanced with the higher return,this is a good position for those who have some extra cash, want thatwant a higher return and some protection against the potential fall ofthe US dollar and for those who wish to speculate and can afford to lose.

We will review this position and many more multicurrency sandwiches inour upcoming courses in November and January.

I hope to see you there!