Everbank Icelandic CD 8.24%

[free4now]

I was just introduced to this seemingly amazing deal:

http://www.everbank.com/

They are paying 8.24% annual interest on a 3 month CD in the Icelandic Krona currency. So during that 3 month period your money is in Krona you will be also taking a currency gamble... if the dollar goes down you win, if the Krona goes down you lose.

An article I got by email says that Iceland is experiencing inflation and their guv has raised the interest rate high to try and stop the inflationary pressure, which is why this opportunity exists.

I'm trying to figure out why this hasn't been arbitraged away by the smart currency traders out there already. The best guess I can make is that there is a risk that the icelandic government will lower interest rates, causing money to flow out of krona back to other currencies, weakening the Krona.

 

[ats5g]

I'm no expert on Interest Rate Parity, so this arbitrage opportunity may have already been taken.

- Alec

 

[MasterBlaster]

You need to read the intro of the book "The Only Investment Guide That You'll Ever Need" by Andrew Tobias

He starts the book out with a very similar discussion of the Mexican Peso

http://www.amazon.com/gp/product/01...102-8359424-5147315?s=books&v=glance&n=283155

Once you go to the Amazon site, Click on the search inside this book link to read the intro and how Tobias was blindsided by the Peso.

Your post suggest that great gains may be acheived via the Icelandic Krona game. However a smarter person may say that this is not the game I want to play at all (to paraphrase Tobias).

 

[free4now]

A graph of the currencies shows that the Krona seemed to follow the Euro pretty closely, but around November 2004 started diverging quite a bit, and it's now much higher.

http://tinyurl.com/azdsz

Maybe that was when Iceland started raising their interest rates which pulled in outside dollars?

 

[MasterBlaster]

Fireme:

Since you have determined "The Sure Thing"

I suggest you mortgage your house, and mortgage your parents house to borrow money for this outstanding deal.

 

[NYCGuy]

Don't forget the 1.5% round trip currency conversion that Everbank will charge you. Also, if you panic and redeem early you lose 100% of your interest plus they charge you more for the return trip back to dollars. So, 8.24 - 1.5 = 6.74% net return before taxes. Compare to the current I-bond rate of 6.73% which is free of state and local taxes.

 

[free4now]

Yikes, 1.5% pretty much eats up the 2.06% that would be earned in 3 months. I suppose if you rolled it forward for a while it wouldn't be so bad, but I think that seals the deal for me.

I searched the everbank site and couldn't find any mention of that 1.5% fee, but from reading other internet posts I understand that it comes about from spreads included in their currency conversion rates, and that it can be up to .75% each way (in and out).

 

[haha]

Fireme:

Since you have determined "The Sure Thing"

I suggest you mortgage your house, and mortgage your parents house to borrow money for this outstanding deal. 

He didn't call it a sure thing. He called it a seemingly amazing opportunity. So to me, he is interested, but cautious. I like to hear about these possible opportunities- maybe some are not a good idea, but some are. So maybe you might rein in the sarcasm?

Ha

 

[MasterBlaster]

So maybe you might rein in the sarcasm?

Well I could have been somewhat nicer so forgive me if I offended. Believe it or not I was trying to be funny. 

However I wanted to point out that this is not a risk free investment. I also wanted to point out that there is a reason that the Krona pays higher interest rates and that the Krona has diverged from the Euro.

Maybe you'll make some money and then maybe you'll take a bath. If it goes the former then you are a very smart guy if it goes the later you'll have yet another life lesson.

 

[cute fuzzy bunny]

We dont go for that funny business and sarcasm around here mister!

 

[ERD50]

Yikes, 1.5% pretty much eats up the 2.06% that would be earned in 3 months.

If you really wanted to make it closer to an apples-apples comparison with US Cds, factor in the cost of hedging the Krona. I've never played with this, but it is the real reason that currency futures were invented. Of course, you are still losing FDIC. Put it all together and it seems to lose it's polish.

Hey, but I think it's good to bring these things up. You never know, it could make sense for someone (moving to Iceland?), and some of us learn in the process of debating the pros/cons.

-ERD50

 

[free4now]

Yep, I'm just looking for debate over the pros and cons of this.

I want to understand more about it since I mortgaged all the equity out of my parent's house in order to get in on this as soon as possible, and I want to know whether I did the right thing

Seriously, I'm a total newbie to currency trading so I'm really seeking to understand the forces that keep interest rates different in different countries, despite efficient markets connecting them. That wiki article provided a good overview of the theoretical forces, and if anyone has any info on the actual forces past present and future that drive the krona disparities I'm very interested.

My guess is that once the icelandic guv lowers their interest rates then people will stop sending money towards iceland and the krona will drop in value back towards it's historical correlation with the euro. And that of course will devalue it relative to the dollar making the deal a loser.

 

[MJ]

I want to understand more about it since I mortgaged all the equity out of my parent's house in order to get in on this as soon as possible, and I want to know whether I did the right thing

I hope you didn't tell them about your their conservative speculation investment.

 

[Jarhead*]

I want to understand more about it since I mortgaged all the equity out of my parent's house in order to get in on this as soon as possible, and I want to know whether I did the right thing

Good Grief! Hope my adult kids don't stumble on this board by accident looking for some ideas.

 

[soupcxan]

You need to read a currency markets book that discusses Covered Interest Parity (CIP). Here is what the a trader could do:

1) Convert USD to Kroner at the spot rate and buy the 3-month foreign CD.
2) Simultaneously buy a forward contract to sell the Kroner (plus interest) in 3-months when the CD matures
3) At the end of 3 months, you settle your foward contract with the proceeds from the CD and arrive back at USD.

The problem is that the forward contract is already priced to reflect the current/expected interest rate of the foreign currency. Therefore, there's no FX risk (you locked in the exchange rate when you bought the CD), but there's also no room for profit, because traders have already arbitraged it away. Plus you're going to pay transaction costs on the round trip, so your net is negative. Not to say that the currency markets are always efficient/rational (remember that dude who bet against the pound sterling and won?) but consider the volume of currency transactions is about $2T per DAY. The world equity markets are less than a tenth of that. The long and short of it is that there are millions of people watching the currency markets...if any joe off the street could get a free lunch by signing up with Everbank then there's a problem.

You should also read "When Genius Failed" about LTCM before you decide to become an arbitrageur.

 

[NYCGuy]

If you really wanted to make it closer to an apples-apples comparison with US Cds, factor in the cost of hedging the Krona. I've never played with this, but it is the real reason that currency futures were invented. Of course, you are still losing FDIC. Put it all together and it seems to lose it's polish.

Actually, you don't lose FDIC with Everbank. Your depoists and CDs at Everbank are FDIC insured up to the standard limits.

 

[Nords]

The other shoe dropped this week on page 95 of the 13 March edition of Business Week's "Krona Groaner":

"Yet another case of 'When rates of return look too good to be true, they probably are'. EverBank.com, an online bank that offers foreign-currency accounts to individual investors, launched three-month certificates of deposit denominated in Icelandic krona in late November. Why Iceland? High interest rates there allow the CD an 8.24% annual yield, nearly double that of dollar CDs. EverBank World Markets President Chuck Butler says the CDs attracted 'tens of millions', the company's most successful launch.
Those CD owners may be surprised. in late February, the krona plunged 6% over concerns about the nation's credit rating. That fall will put many CDs under water, depending on the exchange rate when the CD was issued. Butler says he isn't surprised by the market volatility since Iceland is a small country with a thinly traded currency. 'We picked three-month maturities because we wanted people to have a chance to look and see what's going on', Butler says. It's not a pretty sight. -- Lauren Young"

 

[Arif]

Those CD owners may be surprised. in late February, the krona plunged 6% over concerns about the nation's credit rating. That fall will put many CDs under water, depending on the exchange rate when the CD was issued.

Wow, didn't take long for investors to learn that lesson!

 

[BunsGettingFirm]

Yikes, 1.5% pretty much eats up the 2.06% that would be earned in 3 months. I suppose if you rolled it forward for a while it wouldn't be so bad, but I think that seals the deal for me.

I searched the everbank site and couldn't find any mention of that 1.5% fee, but from reading other internet posts I understand that it comes about from spreads included in their currency conversion rates, and that it can be up to .75% each way (in and out).

The 1.5% charge someone else quoted comes from the fact that Everbank charges 0.75% of the conversion rate to convert your dollar to the Krona. Then when your CD matures, if you want to roll it back to the USD, Everbank charges another 0.75% of the conversion rate.

This thing would only make sense if you want to draw funds in the Krona for travel or business needs or if you really need the income. If your need is the former and if you can find an Icelandic bank that charges no in-bound wire fee, your Everbank Icelandic Krona (deposit account or CD) would provide a floor on the conversion rate. Of course, ensuring a floor only makes sense if you believe that the USD will drop vs. the Krona.

 

[BunsGettingFirm]

You need to read a currency markets book that discusses Covered Interest Parity (CIP). Here is what the a trader could do:

1) Convert USD to Kroner at the spot rate and buy the 3-month foreign CD.
2) Simultaneously buy a forward contract to sell the Kroner (plus interest) in 3-months when the CD matures
3) At the end of 3 months, you settle your foward contract with the proceeds from the CD and arrive back at USD.

The problem is that the forward contract is already priced to reflect the current/expected interest rate of the foreign currency. Therefore, there's no FX risk (you locked in the exchange rate when you bought the CD), but there's also no room for profit, because traders have already arbitraged it away. Plus you're going to pay transaction costs on the round trip, so your net is negative. Not to say that the currency markets are always efficient/rational (remember that dude who bet against the pound sterling and won?) but consider the volume of currency transactions is about $2T per DAY. The world equity markets are less than a tenth of that. The long and short of it is that there are millions of people watching the currency markets...if any joe off the street could get a free lunch by signing up with Everbank then there's a problem.

You should also read "When Genius Failed" about LTCM before you decide to become an arbitrageur.

Another good book to read is A Foreign Exchange Primer before delving into the Forex market.

 

[retire@40]

Do other countries offer something similar to our FDIC protection on bank accounts?

I've often considered putting some cash in a high interest rate stable foreign country, but only if the bank had some kind of deposit insurance that would cover a foreign investor.

 

[cute fuzzy bunny]

I wonder what the risk profile/interest rate comparison would be between one of these currency CD's, some 'high interest rate stable foreign country's bank', and something like vanguards high yield corporate bond fund...

 

[HardCharger]

If you are looking at higher "interest" returns, try something like Fidelity New Markets Income(FNMIX) or Pimco Emerging Markets Bond(PEMDX) or Loomis Sayles Global Bond(GLBLX), these are all Int'l Bond funds that have extremely good returns in a diversified bond portolio. I think that FNMIX is not tied to the dollar either, but is hedged somehow so that it is in dollar denominated currency(not foreign, ie. no currency risk)

 

[Craig]

Perusing some old threads ...

I have a buddy who put about $100K in New Zealand CD's ... paying reasonable interest (comparable to U.S.), picking up additional returns from currency moves, and ... he has considered retiring there.  Tells me that (at least a few years ago), having assets in country aided his potential immigration plans.

[EverBank offers some interesting diversification potential ... ignoring specific currency plays. Looked st some old threads ... appears EverBank is for real, dependable, ala EmigrantDirect.]