New Zealand Term Deposit AC

I will be visiting a family member in New Zealand this summer & am considering setting up a Term Deposit account with ANZ New Zealand. Current Interest Rate is 8.8%. According to ANZ my tax liabilities will be 10% in New Zealand & according to Revenue Ireland I will be liable to DIRT at 20%. Even at this, the return is quite attractive. Does anyone have any experience with operating a similar arrangement & are there any other costs (apart from travel) that should be factored in?

Shouldn't be anyother costs

Possible movements in exchange rates.

The euro has been as low as 1.70 NZD and as high as 2.25 NZD.

Put EUR on deposit in Ireland simultaneously sell EURNZD forward.. untimately the same net EUR payoff as putting NZD on deposit.

bigred said:

Put EUR on deposit in Ireland simultaneously sell EURNZD forward.. untimately the same net EUR payoff as putting NZD on deposit.

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Bigred - can you elaborate on this? How do you go about this? Can you actually earn the NZ interest rate doing this?

Is this down to deposit rates affecting the exchange rate

Simple interest rate parity condition …forward fx rates will equate the rate differentials. E.g. assume the following.
· NZD deposit rates are 10% p.a.
· EUR deposit rates are 4% p.a.
· You have EUR 10k
· EURNZD spot fx rate is 2.00


Option 1) ‘Cash and Carry’. Convert your EUR to NZD 20K and put it on deposit at 10%. In a year you have NZD 22,000 which you can do with as you please.. Hopefully the fx rate hasn’t moved against you!

Option 2) Put your EUR 10k on deposit at 4% and at the same time agree with your bank to sell the EUR 10,400 proceeds for delivery in 1 year in exchange for NZD i.e. agree a 1 year forward contract. The rate will be 22,000 / 10,400 = 2.1154.

Either way you end up with NZD 22k in a year. The crucial point is that you are long EURNZD exchange rate risk under both options. There is no free lunch to be had!

bigred said:

Option 2) Put your EUR 10k on deposit at 4% and at the same time agree with your bank to sell the EUR 10,400 proceeds for delivery in 1 year in exchange for NZD i.e. agree a 1 year forward contract. The rate will be 22,000 / 10,400 = 2.1154.

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Thanks for replying bigred. I think I understand the mechanics of what you are saying. But does any highstreet bank provide that service? What's in it for them to give you a future rate of 2.1154 when the current rate is 2.0

Why doesn't everyone do this? I understand the exposure to fluctuations but its even odds - equal chance of benefitting from fluctuations (except NZD is more likely to plummet)

One advantage of option 1 above it appears to me though is that you can convert back to EUR at an opertune time when the exchange rate is favourable rather than the abitary period of 1 year.

You seem to know your stuff so sorry if I missing something fundamental

EDIT:

Have been having a look at Interest Rate Parity

http://www.investopedia.com/terms/u/uncoveredinterestrateparity.asp
A parity condition stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries’ currencies. If this parity does not exist, there is an opportunity to make a profit.

Hi Groom, No the average retail bank customer will struggle to get the service and decent pricing from a high street bank.. You would need be dealing in pretty decent size e.g. min 100k clips to get direct access to the banks treasury fx desk. You could look at using a CFD provider but with the collateral, frequent rollovers etc the cashflows get messy.

Re: 'I understand the exposure to fluctuations but its even odds - equal chance of benefiting from fluctuations'.. well spotted!.. and many fx trading models are built on this very premise i.e. that the spot rate will move less than the yield pick up.. its a carry model!. Also google 'forward rate bias' model. Generally you will pick up consistent small profits with the odd MASSIVE loss / draw done. The payoff profile is generally similar to writing an option book.

Re: 'What's in it for them to give you a future rate of 2.1154 when the current rate is 2.0' the forward rate is the market zero arbitrage rate.. if the bank is offering a different rate on the open market you can be sure it will arbed away momentarily.

Thank bigred. Alot there to chew on but the important part I take out for now is the 100k part.

Here are 2 deposit account in NZ that pays 10%+ on a 1 year deposit.
http://www.strategicfinance.co.nz/Investing/CurrentRates/
[broken link removed]

They are labelled as Secured First Ranking Debenture Deposits / Stock
Has anyone any idea what this means?