Tuesday, January 1, 2013

Bonds leveraging - Q&A with Interactive Brokers

Just to share some of the Q&A which were posted by one of my visitors. Thanks to him for sharing them to me.
Q: Am I able to deposit funds in SGD and as use them as collateral to borrow USD to buy USD bonds? 
A:  If you open a RegT Margin account, you can deposit funds in SGD and trade USD denominated products by borrowing USD from us. This borrowing is not allowed with Cash account, but available with margin account. If you hold negative cash balance in USD or any other currencies as a result of borrowing or trade loss, there will be interests accrued for the negative cash amount. For more details on interests, please visit our website and select Costs -> Interest & Financing -> Interest Charged to You.
Q: How do I buy USD$200,000 worth of listed speculative grade bond denoted in USD currency?
A:  Based on the assumption that you are holding a RegT Margin account, you can borrow USD100,000 using your SGD cash as collateral to buy USD200,000. However, in actual case, you need to fund a bit more cash in your account to hold the bond position with borrowed money due to the following reasons.
1. Interests will be accrued for the borrowed USD100,000
2. 2.5% margin is required for the negative cash balance in USD. (please check Forex tab on Margin Requirements page) 
Q: Can you illustrate an example showing how the 2.5% margin requirement for negative cash balance in USD comes about?
A:  Please find an example (forex rate used: USD1=SGD1.3) as follows.
1. Before you trade
Cash: SGD150,000
Available Funds for trading is USD115,385 (Cash)
2. When you buy USD200,000 worth of speculative grade bond
Cash: SGD150,000/ -USD200,000
Position: USD 200,000 worth bond
Margin Requirements: USD100,000 (50% of bond value) + USD5,000 (2.5% of USD negative cash balance) = USD105,000
Available Funds for trading: USD10,385 (Cash + Position Value - Margin Requirements)

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