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

Possible Mirror Images?

Graphs of Differenced Series’ Is this already white noise?

Pre-Whitened Series  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)

Non-GARCH Model

Correlogram of Residuals and Residuals Squared

ARCH-LM

GARCH (1,1)

Correlogram and ARCH-LM Test

Forecast of non-ARCH model

Forecast of GARCH(1,1) model

Graph of Forecasts and Actual

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