Interest rate differential business
In general in finance, interest rate differential business is the use of the interest rate differential between the low credit interest and the higher lending interest through the use of financial products .
General
An interest difference exists if there is a difference in Germany between the loan interest and the credit interest with the same term of the interest- bearing financial products. If the interest level in Germany does not match the interest rate in a foreign currency - again with the same term of the financial product - there is an interest rate difference between Germany and abroad. These interest rate differentials can be exploited profitably, but only credit institutions are allowed to do so .
Legal issues
The German non-bank “Targetum Treuhand GmbH” accepted deposits from private individuals and lent them as loans to borrowers , using them to operate interest rate differential transactions. In June 2018, the banking supervisory authority BaFin banned these transactions because the company did not have a banking license , but the lending or deposit business it conducted required one. Since the company was unable to repay these deposits, it filed for bankruptcy , which was entered in the commercial register on September 3, 2018 . The company had carried out commercial banking business ( deposit business according to Section 1 (1) No. KWG , lending business according to Section 1 (1) No. 2 KWG), for which it would have required a license according to Section 32 (1) KWG.
If interest rate differential transactions are carried out by non-banks, these always require the approval of BaFin, which is, however, regularly denied because these non-banks would be subject to banking supervision and would have to observe banking law .
Applications
The classic interest difference business in the broader sense is operated by credit institutions with the lending business and deposit business. This term is used in this form, especially in Switzerland . It is that banks deposits ( sight , futures and savings assume), and this against a credit margin borrow as loans; the credit margin is the difference in interest rates between lending and deposit business. If the maturities of the deposit business in the lending business are not taken into account, the institutions operate permitted maturity transformations , which influence liquidity .
In a narrower sense, the interest rate differential business is the speculative exploitation of the international interest rate differential while accepting the currency risk by raising money at low credit interest rates in order to borrow this amount of money with a higher interest rate. For this purpose, the trading strategy of the currency carry trade is used, in which a foreign currency loan is taken out in a low-interest currency only in order to invest the amount with higher interest in another currency. Borrowing takes place in low-interest countries , and investments are made in high-interest countries . The chances of winning or the risk of loss arise from the interest rate difference and the currency risk during the term, whereby the interest rate difference can be eliminated by adverse exchange rate fluctuations.
Aside from the currency risk, interest rate differential arbitrage is worthwhile if the interest expense is lower than the interest income :
In order to eliminate the currency risk, the exchange rate risk would have to be eliminated by means of a hedging transaction , which, however, causes transaction costs ( swap rate ) that usually correspond to the interest rate difference.
An example of currency carry trades was the continuing since 1995 revaluation of the US dollar against the yen , the trader prompting, foreign currency debt included in yen and buying of higher-yielding US - to use bonds - $. The chances of winning ended abruptly with the Russian crisis that began in August 1998 at the latest .
The risk-free interest rate differential arbitrage combines the investment at the place of the highest interest income with a simultaneous borrowing of the same term at the place of the lowest borrowing costs. For example, an arbitrage profit between the money market and the time deposit market can be achieved by buying a forward currency with the simultaneous purchase of a put option and the sale of a call option .
economic aspects
The interest parity theory developed by John Maynard Keynes in 1923 assumes that market participants cannot benefit from the interest rate difference between two currencies (in the long term). This is due to the fact that many market participants engage in interest rate differential arbitrage ( herd behavior ), so that the interest rate differential decreases until the arbitrage is no longer worthwhile.
Individual evidence
- ↑ Consumer Center Hamburg of February 27, 2019, Targetum - not well advised , accessed on July 15, 2019
- ^ AG Hamburg, decision of August 7, 2018, Az .: 67g IN 267/18
- ↑ Max Lüscher-Marty, Theory and Practice of Bank Loans 1 , Volume 1, 2009, Chapter 1.02
- ↑ Jürgen Krumnow / Ludwig Gramlich / Thomas A. Lange / Thomas M. Dewner (eds.), Gabler Bank-Lexikon: Bank - Börse - Financing , 2002, p. 270 f.
- ↑ Dimitri Speck, Geheime Goldpolitik: Why the central banks control the gold price , 2014, p. 60
- ↑ Claus Hilpold / Dieter G. Kaiser, Innovative Investmentstrategien , 2010, p. 223
- ↑ Willi Albers (Ed.), Handwörterbuch der Wirtschaftswwissenschaft (HdWW) , Volume 1, 1977, p. 328
- ↑ Ulrich Boettger, Cash Management of International Corporations: Strategies - Organization - Implementation , 1995, p. 197
- ↑ Metz Dennis, Foreign Exchange - simplified , 2014, p. 57
- ^ John Maynard Keynes, A Tract on Monetary Reform , 1923, p. 127
