Wednesday, November 05, 2008

President's Choice carry trade

I noticed something interesting over on the President's Choice financial site. They are offering a 0.97% interest rate for 6 months on balance transfers on PC MasterCard. At the same time they are offering 3.05% savings account interest.

That means it should be possible to do a carry trade on PC financial; since you can borrow money at a low interest rate and then invest it at a higher rate and pocket the difference. I suppose it's probably more of an arbitrage than a carry trade but I like the sound of the term carry trade better so I'll call it that.

You could do it like this. Use a different credit card to fund a deposit (say $1,000) to a 3.05% PC savings account. Most credit cards have a "twin cheque" feature where you can write a standard style cheque as a cash advance on your card. This advance usually has a fee of around $7.

Then do a balance transfer from PC MasterCard to the original credit card of $1,007 to pay it off.

Then wait 5 months, making the minimum payment on the PC MasterCard. Be careful not to hit the 6 month point where the 0.97% interest expires on the PC MasterCard introductory rate.

After 5 months empty the PC savings account and use it to pay off the PC MasterCard. This is about where you would be after 5 months.

At 0.97% interest you would pay around $4.07 interest on the $1,007 PC MC balance for a total of $1,011.07.

At 3.05% interest you would earn around $12.71 interest on the $1,000 savings account balance for a total of $1,012.71.

So when you pay off the PC MasterCard you would show a small profit of $1.64.

Now that's not very good because the $7 transaction cost wipes out most of the profit. With increased leverage however it becomes free and easy money.

For example on a $5,000 carry trade with the fixed $7 twin cheque cost you would have an expected profit of around $36.31. On a $10,000 carry trade you could make about $79.64 on the interest rate difference.

So if you have a good credit rating and credit available on a couple of cards then you can take some easy money off the banks. ha ha. I'm not quite there yet myself but being able to do this type of thing is this dream of mine. Perhaps I'll get there someday.

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