Forex: Risk, Reward, and OPM

In the coming days I'm going to launch another Forex project. This one is going to have an element of risk to it that does not exist in my typical way of going about this stuff, and I do not recommend you do it unless you've got reserves to cover the extra obligations it will entail. What am I up to?

In short, I'm going to use the principal of OPM: Other People's Money. This is when you use someone else's money to create a better return than you could using only your own money.

Since 1994 when I was in the Army and took out my first auto loan, I've been on the radar of credit agencies and lenders. In the fourteen years since I have managed to build up a great track record with them. This has resulted in a fairly consistent stream of good offers with great terms attached. One such offer arrived recently and I decided to take it. For the next eleven months, I have access to some of Discover Bank's cash at 1.9% interest. I'm going to put this to work in the Forex.

And that's why I say don't give this a go unless you have cash to cover the amount borrowed - things can go wrong and you still have to pay the money back.

Here's the plan:

First, I'm going to set aside enough of the borrowed cash to make the minimum monthly payments on the loan for ten months. I technically have the low interest rate for eleven months, but I want to have their money back to them and the loan settled before the rate expires; I won't be sacrificing much by stopping one month early (and this may end sooner, more below). To calculate this amount, I simply multiply the total amount of the loan (the amount borrowed plus the transfer fee) by .02, since the monthly minimum is 2% of the balance, multiplied by 10. These funds will be placed in an ING Direct account that will be set to send the original minimum payment amount automatically each month to my checking account (this will be matched by an automatic draft for this amount from Discover's side). After the first month this will result in a slight overpayment of the monthly minimum required, but it's a small matter (and a small bonus since it will put loan repayments slightly ahead of schedule). The trade-off in terms of reduced hassle over keeping track of the payments is worth it. The account will also finish up with a small sum remaining from accumulated interest. The reason I am doing this is simple: I don't want to pay out of my own pocket for this loan, so I'm just going to return their own money to them instead. My personal cash flow will not be impacted in terms of outflows, but my inflows will grow.

The remainder of the funds will go into my Forex account to be used as I normally use what I have on deposit there:

1. a position is opened in the currency pair offering the greatest yield with 10% of the account balance

2. positions are added to when accumulated interest and/or deposits drops the "in play" amount below 10% of the balance

3.any and all positions are closed out if the value of the trade exceeds the amount of one day's interest (two day's worth if the winning position is noted during the weekend shutdown).

4. positions are immediately reopened at 10% of the new balance (if using a pair such as USD/TRY, which currently is the highest if held short, it's best to wait until the appropriate session in which spreads are the tightest for the particular currency since spreads can reach into the hundreds during "off peak" hours in some cases).

Beyond these, my usual rules, I'm adding one more for this project:

5. The project will terminate when one of two events occurs, whichever comes first:

5a: 10 month's time passes from the beginning of this project, at which point the remainder owing to Discover Bank will be withdrawn from the Forex account and repaid, leaving behind capital gains and accumulated interest, or

5b: The value of the account, minus the amount of funds already on deposit in the account at the moment the borrowed funds arrive, doubles, at which point the borrowed sum will be withdrawn and combined with the loan funds remaining in the ING Direct account, then repaid in full at the end of the ten months (unless the ING Direct savings yield drops to 1.9% or less, at which point the funds will be returned to Discover Bank immediately).

I know that some may be scratching their heads and wondering, "why do this?" The reason is that my monthly Forex income will jump by ten times its current level at the start of the project, increasing as the balance of the account rises, and it can all be done without impacting my current standard of living. If the account doubles before the end of ten months and I pull out the borrowed funds, that will mean that what is left behind will also leave my Forex income at the level of this initial ten-fold increase. This also means that the borrowed funds are no longer at risk and I will be completely "in the clear" as far as this debt obligation in concerned. Meanwhile, the total amount of interest that will be charged on this debt over the life of the loan will be less than the amount of one month's interest earned within my Forex account, and that's even after subtracting out some of the loan money with which to pay those monthly minimums anyway (and that's also without taking into account the interest charged negated by interest earned in the ING Direct account I'm creating for this project)!

If successful, the result will be an enhanced capital base that will be 100% mine. I could build this amount I'm aiming for here with my existing balance and additional contributions, but that would take more time than going about it this way will. I am taking on a greater degree of risk by doing things this way, but that's the nature of the beast: greater risk leads to greater reward.

I'll keep you posted!