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Riskless Interest in the Foreign Exchange Market. Presented by Gregory Adams Samantha Gardner Brett Hanifin Ali Irktur Ryan Nabinger Xiaoyin Zhong. Introduction. Our purpose is to see if there is a way to gain risk-free interest in the Forex market
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Riskless Interest in the Foreign Exchange Market Presented by Gregory Adams Samantha Gardner Brett Hanifin Ali Irktur Ryan Nabinger Xiaoyin Zhong
Introduction • Our purpose is to see if there is a way to gain risk-free interest in the Forex market • We looked at the ratio of the Euro (EUR) to the US dollar (USD) and the US dollar to the Swiss Franc (CHF). • Analyzed daily data from past five years
Strategy Background • Interest is paid daily for positions held in the Forex market based upon the differing interest rates in the economies involved in the currencies • Gain money from interest, not from price movements • Cancel all price movements through successful hedging • Use high leverage to make a decent return on investment
The Strategy • Use as much margin as comfortable • Some brokers offer as much as 200:1 leverage • Buy equal quantities of EURUSD and USDCHF currency pairs • Hope the price movements between the pairs cancel out • Gain daily interest • Close both positions at the same time
Graphs of Differenced Series’ Is this already white noise?
We created SUM, which is the sum of the two differenced series. We looked at the correlogram, histogram, and unit root test for SUM. It suggested an AR(1) MA(12) MA(17) MA(24) Pre-Whitened Series
Conclusions • Each model predicts that the price movements will cancel each other out in the long run • The buy and hold strategy is considered the most appropriate by our models • There is money to be made, but risk-free may not be the proper word for it • Margin Calls on the losing pair • Long streaks of mismatched price movements