A Multi Currency Strategy Geared for High Returns

If you have never heard of the "currency sandwich" strategy before, you are probably not alone, but believe me it does exist. Investors in the know have been using this “distortion” in the world’s currency market to make some high returns for decades. A word of caution: this strategy is not for the faint of heart, but for those that can risk big losses for its substantial rewards.

In simple terms, the currency sandwich is a strategy where one borrows a low interest currency and then investing the loan in multiple currencies with higher returns than the cost of the loan. This difference in interests has returned many investors profits in the double to triple digits range, however, this strategy is highly speculative and is not without risks.

The cost of repaying the loan together with interest will go up should the exchange rate on the loan currency goes up, thus the net profits will decline. As long as the interest differential is larger than a possible negative development in prices and exchange rates, a potential gain on the investment is made.

Here is an example of how a multi-currency portfolio yielding 30.35% was executed based on current bonds and interest rates at the time.

1. Invested $100,000 in 6.5% Euro Baa2 rated Ford Motor (F) Credit bonds that matures January 2008 yielding 5.10%
2. Used the bonds as collateral for a loan at four times gearing/leverage for $400,000.
3. $200,000 borrowed in Yen [YEN] @ 1.75%
4. $200,000 borrowed in Swiss Francs [CHF] @ 2.25%
5. $100,000 invested in AA+ rated Hungarian bonds [HUF] due in 2008 yielding 7.25%
6. $100,000 invested in AAA rated Landesbank HES bonds [NZD] due in 2007 yielding 7.00%
7. $100,000 invested in AAA rated Icelandic government T notes [ISK] due in 2007 yielding 9.00%
8. $100,000 invested in Baa1 rated Mexican bonds [MXN] due in 2008 yielding 9.75%

This multi-currency portfolio takes advantage of both leverage and positive carry. Leverage is accomplished from the use of the original investment in the Ford bonds as collateral for a loan. The 25.25% above the 5.10% yield of the original Ford bond investment is pure profit. Positive carry is accomplished from borrowing at 2% and getting an average return of 8.31%.

While this example was a success, as mentioned above there are risks in this strategy. One could lose the entire $100,000 investment because bond values can drop, foreign currencies can change and interest rates can rise or fall.

Investors interested in the currency sandwich should visit Jyske Bank for more info. They are Denmark’s 2nd largest bank that specializes in the multi-currency strategy and have created several model portfolios like the example above as investments. Private banking services including currency investments with Jyske can be found here.

For additional information and training on this currency trading method, you can visit Gary A. Scott's website. Gary A. Scott is one of the foremost authority on "The Currency Sandwich", international investing and the source for the above story and example.

Comments

[ikkyu:]

Thanks for your article. I think it is much easier and safer to carry trade with a reputable currency market maker like Oanda.

Cheers from osaka,
john

2008 Jan 06 08:16 PM

[phdinsuntan...:]

if interest rates goes up,
you are a dead man:
your bonds will head south...
and you are broke

2008 Jan 07 01:42 PM