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Posted by: John W on 2010-08-30, 07:13:08
My opinions are purely speculative and I do not claim any expertise in the matter but as an engineer, I would start by looking for correlations between the two currencies along with indicators of trade between the two countries and perhaps with other countries and their currencies. The idea being to find relationships due to arbitrage from the respective interactions of the economies. It should be an easy matter of identifying which countries each country trades with and it should be possible to also take each countries major indicators into account as well. The idea would be to identify causal effects that could be exploited to hedge your investment. After that, I would focus on how to estimate the probability of success or failure and the expected returns or losses over limited time frames and use those numbers to proportionally allocate capital to the various arbitrage plays identified. IRA accounts are a tax deferred investment vehicle available to people working in the States and they operate just like a regular brokerage account except that they are taxed when funds are dispersed when you retire. You ask how to play an expected appreciation, do you have an estimate of how much that appreciation will be, how probable is that appreciation, what time frame would that appreciation be over and what would the outcome be if it does not occur. If you have reasonable estimates that you believe in, you can use Kelly's Criterion to estimate the maximum investment you can make before risking unfavourable long term outcomes, since these are just estimates that are almost certainly wrong, you should always use a fraction of the Kelly's number to be on the safe side. Of course, this only reserves capital for future opportunities but just think of how well off you would've been if you had some funds in reserve during the crash of 2008. |
