Author Topic: Anyone invest in foreign banks that pay high interest?  (Read 9974 times)

watermen

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Anyone invest in foreign banks that pay high interest?
« on: February 12, 2013, 08:07:12 PM »
Looking into this option. For example Australian banks seem to be pay more than 4% interest. Vietnam banks 10%. ....

arebelspy

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Re: Anyone invest in foreign banks that pay high interest?
« Reply #1 on: February 12, 2013, 08:11:24 PM »
When you do that, you're basically speculating on currency.

If their dollar (or whatever) falls versus ours in the meantime, it could more than wipe out your gains and turn them to losses.  If theirs rises versus ours, it could way overshadow the small interest you're getting.

If you have no currency knowledge, then you're basically gambling hoping it stays the same or goes up. 

Unless you are living in that country, so your expenses are in their dollars (so the exchange rate doesn't matter to you), it's quite risky.
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KingCoin

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Re: Anyone invest in foreign banks that pay high interest?
« Reply #2 on: February 12, 2013, 09:07:45 PM »
In the finance world, this is called the "carry trade". Basically you borrow in a currency with a low interest rate (Swiss Franc or Yen for instance) and invest in currency with a high interest rate. On average this strategy does fairly well. However, to do it properly, you need to invest in a basket of high yielding currencies to get the benefits of diversification. Unless you're a hedge fund or a sophisticated investor, this will be very complicated to implement directly (opening foreign bank accounts can be difficult or impossible).

The easiest way to take advantage of this effect is to buy DBV, a fund that implements this strategy:
http://www.google.com/finance?q=NYSEARCA:DBV

It can serve as an interesting portfolio diversifier, but you'd probably be wise to steer clear unless you have a good understanding of the dynamics of this trade.
« Last Edit: February 12, 2013, 09:11:00 PM by KingCoin »

marty998

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Re: Anyone invest in foreign banks that pay high interest?
« Reply #3 on: February 12, 2013, 11:51:12 PM »
You'll get fucked on the way in converting your funds. Unless you are an insto client the bank will take 3% on the FX transfer of USD to AUD.

Then you get fucked on the way out with another 3% gone. No Bank would like to hold Vietnamese Dong for too long, so you will probably get hit with a higher bid-ask spread if you go down that path.

So therefore your interest rate differential needs to be 6%, and that is excluding the risk of currency movements as explained by arebelspy.

Most Aus economists believe the AUD is overvalued, and the Reserve Bank is covertly (and since that hasn't worked is now overtly) trying to dampen enthusiasm for the Aussie dollar. The problem is that every other country is trying to kill their own currency too. See what Japan are doing.

My advice is that if you want to send your money anywhere but your own country you do it at your own very large risk.

strider3700

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Re: Anyone invest in foreign banks that pay high interest?
« Reply #4 on: February 13, 2013, 12:29:39 AM »
I have an etf of canadian banks that pay 7% dividends  does that count?

tooqk4u22

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Re: Anyone invest in foreign banks that pay high interest?
« Reply #5 on: February 13, 2013, 08:19:21 AM »
If you are very high net worth then this strategy can make sense and play a role in the overall asset allocation.

If you have a diversified asset allocation that includes foreign equities or domestic equities with foreign operations then your portfolio already has currency exchange exposure.

KingCoin

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Re: Anyone invest in foreign banks that pay high interest?
« Reply #6 on: February 13, 2013, 08:47:55 AM »
I have an etf of canadian banks that pay 7% dividends  does that count?

No, given that I can almost guarantee that whatever's in that ETF is very much junior to bank deposits.