- Situation
- I am paid a fixed amount X of money in USD at the end of each month Y.
- I can choose X to be paid either in USD or EUR and have to do this choosing until the 20th of each month Y.
- If I choose to be paid in EUR the exchange rate EUR.USD Z is already pre-determined at the first of month Y, therefore roughly one month prior to being paid.
- Assumptions
- I have an exploitable information, since the exchange rate EUR.USD continuously -including the time from the first to the 20th the of each month Y- moves up or down as compared to the rate pre-determined at the first of month Y according to which I will be paid at the end of the month and via clever trading I can gain as per below.
- Exploitation
- If the EUR goes up -I set the limit at 1 %- until the 20th of the month I
- sell X/Z EUR with the exchange rate EUR.USD of Z101/100 at my brokerage account on margin loan at the same time buying XZ*101/100 USD
- buy XZ101/100 USD as stock ETF at my brokerage account
- lock in the currency which I will be paid according to the pre-determined rate as EUR
- am paid at the end of the month X/Z EUR and wire the same to my brokerage account so as to balance my margin loan
- As a result of these transactions, I gain XZ1/100 (1%) USD and the margin loan I have to pay is on average more than paid off by the stock ETF since the rate of return for stock ETF is higher than the interest rate for the margin loan
- If the EUR goes down -I set the limit at 1 %- until the 20th of the month I do the same the other way around and I
- buy X/Z EUR with the exchange rate EUR.USD of Z99/100 at my brokerage account on margin loan at the same time selling XZ*99/100 USD
- buy X/Z EUR as stock ETF at my brokerage account
- lock in the currency which I will be paid according to the pre-determined rate as USD
- am paid at the end of the month Z USD and wire the same to my brokerage account so as to balance my margin loan
- As a result of these transactions, I gain XZ1/100 (1%) USD and the margin loan I have to pay is on average more than paid off by the stock ETF since the rate of return for stock ETF is higher than the interest rate for the margin loan
- If the EUR goes up -I set the limit at 1 %- until the 20th of the month I
- Questions
- Is my above assumption under 2. right?
- Is my exploitation under 3. according to which I gain 1 % right?
- Is the limit 1% chosen approximately or would you suggest another limit or optimize the same?
- Can I increase my exploitation higher than the 1 % gain already realized, for example via leverage instruments?
- If so, could you please advise these methods of higher exploitation?
Surely, you’re still left with the eternal question? -
How to decide if the EUR/USD exchange rate will rise or fall?
I do not know about falling or rising exchange rates. Therefore, at the brokerage I issue a cancel one another order for the EUR.USD buying/selling. If the rate goes up by 1 %, I go for exploitation scenario 1. If the rate goes down I go for exploitation scenario 2. Either way, by way of the order type, if one scenario has happened, the other will be cancelled.
If I understand correctly this is what some traders do, and they call it a bracket trade. Looking at the current price they set a buy order above and a sell order below. If price passes through either order level that entry order is triggered, and if it continues they make a profit.
Some traders set a stop-loss in the opposite direction to limit their losses and specify to their broker that their orders are one-cancels-the-other, so that for example the sell order is cancelled as soon as the buy order is triggered. Brokers in some regulatory jurisdictions will allow the opposite order to be triggered if price hits that as well, so that for example the loss on a long position is balance by profit on a short position if price falls significantly.
Neither of these approaches is a guaranteed win. Its very possible for price to pass through one entry order level and then retreat back through it and never hit your profit target price, resulting in either a small loss or a small gain. With opposing orders, its even possible for both orders to end as losers. But the set-up is worth working through as a back-test exercise or even in a demo account.