The Amazing 35% Annual Interest Income

I spoke with someone recently who is in the know about things financial. He works in that industry, but what I do with Forex is apparently new to him. When I got around to telling him that I get around 35% annual interest, he didn't understand how that could be possible.

It does sound outrageous, I know. But it is real. Here's how it goes...

Say you have $1,000 deposited in a Forex account set for 50:1 leverage. If you do what I do, then you would sell $100 worth of USD/TRY (U.S. Dollar vs. New Turkish Lira), which presently has a positive interest differential of 13.25% when held short in an Oanda account (the bid on TRY is 15.75% and the ask on USD is 2.5% with this particular broker - you subtract ask from bid to determine the interest you'll receive or the interest you'll pay).

When you do this, the first thing that happens is the $100 is divided by two. This is typical of how margin works in trading accounts, it's a 2:1 ratio. So...

$100 / 2 = $50
This $50 is the sum that gets leveraged, the 50:1 deal. Basically, this means that for every dollar committed to the trade, the broker allows you to control $50 out there in the exchange market. So then...

$50 x 50 = $2500
This is the value of the trade itself, the total amount of USD swapped for TRY. Thus, this is the amount the 13.25% positive interest differential is applied to:

$2500 x .1325 = $331.25
$331.25 is the interest you'll receive if you were to hold this trade for one year.

In addition, Oanda pays their prevailing bid rate for USD on the cash you actually have deposited in the account. Currently that rate is 1.95%. So...

$1000 x .0195 = $19.50
The interest from the trade plus the interest from your account deposit total...

$331.25 + $19.50 = $350.75
...which divided by your deposit balance equals...

$350.75 / 1000 = 35.075%
So there you have it! It may still seem outrageous, but it's real. I receive interest payments every single day of the year in my account. And this doesn't even include capital gains. The key to remember is that leverage is involved, so while the actual interest rate on the trade is 13.25%, the actual amount you receive is increased by fifty times, rather than the interest rate applying only to the original $50. Then, for the sake of understanding return, the resulting interest is divided against your actual amount on deposit since it is these funds that are actually at risk in the market during a trade, which results in the incredibly high interest rate overall.