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Maximizing The Return On Nikkei Surge

|Includes:DXJ, iShares MSCI Japan ETF (EWJ), FXY

The recent BOJ quantitative easing and subsequent surge in Nikkei provides a significant opportunity for retail investors. The obvious choice will be either EWJ (iShares MSCI Japan Index fund) or DXJ (Wisdom tree Japan Hedged Equity). As the name suggest DXJ is hedged against currency losses while EWJ is not. The currency moves play a significant role when one invests in Foreign ETF's. Given below is a table which summarizes the movement of EWJ & DXJ after the BOJ announcements

Date EWJ Closing Price $ DXJ Closing Price $
04/03/2013 10.47 40.82
04/04/2013 10.90 43.88
04/05/2013 10.96 44.51
04/08/2013 11.07 45.42
Total Gain $ 0.70 4.60
Total Gain % 6.70 11.30
Click to enlarge

The 11.30% increase in Nikkei is offset by 4.6% of currency losses giving a net gain of 6.70%

Yet another way of hedging the above currency loss of 4.60% is either to short or buy a put option on FXY (CurrencyShares Japanese Yen Trust) FXY tracks the price of Yen net of trust expenses. Given below is the outcome of this scenario

Date EW10.96J Closing Price $ FXJ Closing Price $
04/03/2013 10.47 105.42
04/04/2013 10.90 101.80
04/05/2013 10.96 100.17
04/08/2013 11.07 98.61
Total Gain 0.70 6.81
Click to enlarge

It is assumed that the investor will either short or buy a deep in the money put option of FXY with a delta nearing 100.

Thus the total gain could be $7.51 as compared to DXJ's $4.60

The investor should be careful as the above figures are based on the current scenario of surging Nikkei and the weakening Yen. The strategy should be modified based on investor's perception of Yen and Nikkei movement.

Disclosure: I am long EWJ.

Stocks: EWJ, DXJ, FXY