March 20, 2008
Other Undisclosed Factors
Thanks to reader “Charlie” for hipping me to the Market Vectors Chinese Renminbi/USD ETN. I read the four pages of risk factors (”a non-exhaustive list” though certainly repetitive) in the prospectus. Key bit:
“The exchange rate between the Chinese RMB and the U.S. dollar is managed by the Chinese government with reference to a basket of currencies and is based on a daily poll of onshore market dealers and other undisclosed factors [ed. which may or may not include consulting a feng shui master].
The People’s Bank of China, the monetary authority in China, sets the spot rate of the Chinese RMB, and may also use a variety of techniques, such as intervention by its central bank or imposition of regulatory controls or taxes, to affect the Chinese RMB/U.S. dollar exchange rate.
In the future, the Chinese government may also issue a new currency to replace its existing currency or alter the exchange rate or relative exchange characteristics by devaluation or revaluation of the Chinese RMB in ways that may be adverse to your interests.
The exchange rate is also influenced by political or economic developments in China, the United States or elsewhere and by macroeconomic factors and speculative actions. To the extent that management of the Chinese RMB by the People’s Bank of China has resulted in and currently results in trading levels that do not fully reflect market forces, any further changes in the government’s management of the Chinese RMB could result in significant movement in the value of the Chinese RMB.
Changes in the exchange rate result over time from the interaction of many factors directly or indirectly affecting economic and political conditions in China and the United States, including economic and political developments in other countries. [ed. You already said that… lawyers bill by the hour, never forget.]
How’s that for a Cover-Your-Ass passage?
Reader “Rod” has commented on his difficulties beating the “roll yield” while long the CNY futures — this ETN faces the same challenge, I believe.
March 20th, 2008 at 12:21 pm
I need a discussion of the difference between FXI and FXP
FXP is suppose to be an inverse of FXI - but it’s not -
FXP has wild action - it seems to be when our markets go down - but that isn’t so.
OK, I have read the entire Travis McGee series - not your fault - you recommended one book and one led to another.
So. Here is a book, maybe you have read it, It’s about how we think. “How Do We Know What isn’t so” by Thomas Gilovich. It has helped me make better trading decisions and get out of my head when something doesn’t go well. But there is much more - It’s a HEAD book! Actually, this is my favorite book of 2007
paul
March 20th, 2008 at 2:22 pm
paul: Thanks for the book recommendation… I’ll bookmark it and look for it or you can send my a copy in lieu of subscription fees.
I believe I saw a discussion of the FXP at Master David Jackson’s serf colony, Seeking Alfalfa, but I don’t have a link. Google perhaps?
The McGee books are good but go downhill as John D. got older and times changed… but those books from the early/mid-60s are great… similar to the James Bond movie franchise… the Sean Connery ones were the peak and then it went downhill from there (the 70s were a terrible time, possibly worse than the 1930’s in many ways.)
March 20th, 2008 at 3:12 pm
So would you invest in CNY?
March 20th, 2008 at 3:47 pm
moom: I’ve been heavily invested in the CNY since the dark ages of 8.27 to 8.33. As a student in 1993 I was even able to exchange a nice chunk of dollars at 1 for 10 with a desperate buyer (those were the days).
Now that they’re offering an ETN, I’d have to say it’s better to be cautious… Wall Street has a way of feeding quacking ducks.
March 20th, 2008 at 5:38 pm
I meant the ETN. I’m thinking about it and then I think hmmm 8% why not try my luck with a regular stock instead.
March 20th, 2008 at 5:53 pm
moom: As I said, I’m a little suspicious about the timing of this thing, and as we all know past returns don’t indicate anything about future performance… and there’s the tax angle to consider. Read the whole prospectus closely if you’re really interested in it.
March 20th, 2008 at 7:36 pm
I’d assume that in Australia it would be treated as any capital asset - either short or long term CGT depending on how long it is held. We don’t have any special treatment of futures or currency contracts here - they are treated as current regular income. This would be a US stock.
March 20th, 2008 at 9:05 pm
Paul, FXP is the double short of the FTSE/Xinhua China 25.
March 20th, 2008 at 10:51 pm
What about the RMB Money Market account avail. thru everbank.com
Does anyone know how they track the currency?
March 21st, 2008 at 6:49 am
adam: They probably explain how they do it at their website.
My ten second search revealed this: “If you request funds in this account to be denominated in a currency other than the currency sent to us to fund the account, we will convert your funds using a then current conversion rate set by us. Your currency conversion rate will be within 1% of the wholesale spot price we pay for your currency.”
March 21st, 2008 at 7:26 am
Hi Chairman
Thats true re: roll yield. Reader moom replied: “Well you have to count the interest you are earning on your USD in your account offsetting the interest paid on the future.” He/she doesnt get it. The contango you lose as forward prices gravitate to spot at expiry is FAR higher than the T-bill rate you get on only having a small margin tied up in your futures position.
March 21st, 2008 at 8:09 am
I do get it - it costs you interest to have a levered position. Now depending on the carry cost it may cost even more than the interest on a cash position big enough so that you are unlevered but those are two issues one general to all futures and the other specific to this contract maybe.
March 21st, 2008 at 9:46 am
moom: You may want to read this post on contango markets where negative “roll yield” happens.
March 21st, 2008 at 3:59 pm
Don’t forget that ETNs introduce the credit risk of the issuer into the trade as well.
March 21st, 2008 at 4:23 pm
Contango is the norm for example in US stock index futures. I was trying to explain this, but maybe I wasn’t clear. It’s the default situation for futures as I understand it. Maybe I just don’t get what the point is here.
March 21st, 2008 at 7:42 pm
Moom
Set up a spreadsheet to calculate the numbers you are talking about. You will find, at least from Nov to Feb when I was long the RMB future on CME, that the roll yield was much greater than the interest rate for the relevant fraction of a year. Youhave to calculate the numbers. I made $700 on my futures position in 3.5 months, while spot would have made over $4k. Thats more than the interest rate difference between RMB and USD.
March 21st, 2008 at 7:43 pm
Ther roll yield includes convenience of spot vs. futures, and expectation of future spot prices.