Spread Betting the Euroswiss
The Euroswiss is an interest rate contract, in this case the notional lending rate of the Swiss National Bank. The current spread betting quotation is 9994 – 9995, and this can be a little confusing until you realize what it represents. With all interest rate futures contracts, the number quoted is the same as 100% minus the actual interest rate, but with a couple of extra figures to make it into the “points”.
Interest rate futures contracts are quoted on the three-month futures prices. Obviously interest rates can vary, depending whether they are for the next day, next month, next year, or 10 years away. The futures market quotes them on a quarterly basis, with settlement in March, June, September, and December. All this is mildly interesting, but not particularly relevant for the simple practice of spread betting, where you are presented with a single quotation.
Coming back to the quotation given above, it is the same as 99.94% – 99.95%, which means that the actual interest rate it represents is the very small amount of 0.06% – 0.05%. The Swiss keep tight control on their economy, particularly as they depend on trade, mainly with Europe, for the health of their finances. The Swiss National Bank at present is using interest rates to try to make the Swiss franc less attractive on the foreign exchange market, and that is the reason for the very low interest rate represented.
As you can see, there is little scope left for reducing the interest rate further, but the bank has been charged with trying to maintain a currency exchange rate with the euro of 1.20, and the main tool which it has to do this is to reduce the attractiveness of the Swiss franc by lowering the interest rate. The problem is that if the Swiss franc becomes more valuable, and therefore costs more on the Forex market, then Swiss exports become more expensive and this leads to a slowdown in the Swiss economy. The Swiss bank is using what devices it can to prevent this happening.
This led to an interesting situation towards the end of 2011. You might think that the value of the Euroswiss logically could not get much greater, as that would imply a negative interest rate. But the Swiss National Bank stated that negative interest rates for nondomestic deposits could not be ruled out, and this was shown by an increase in the Euroswiss to above 10,000.
This means that funds placed on deposit in a Swiss bank could in theory be charged for that privilege, rather than being paid interest. The logic behind this is that the Swiss franc would be strengthening, thus any funds placed into the currency would grow in relation to other currencies and therefore still result in a gain for the investor when the funds were repatriated.
Despite this, the possibility of much gain in Euroswiss is unlikely, and if you are betting on this financial instrument, you should be prepared for Swiss interventions that can disrupt your calculations.
Spread Betting on the Euroswiss
The current quote for spread betting on the Euroswiss interest-rate futures is 9994 – 9995, representing an interest rate very close to 0%. As mentioned in the “Fundamentals” description, this value has at times exceeded 10,000, even though that would sound illogical. However, it is probably a safer bet to go short or sell this product, but only when you believe that the conditions are right for a profit. It has a minimum bet of £5 per point with IG Index, so assume you place a short bet for £15 per point.
The success of this spreadbet may be subject to the Swiss National Bank releasing some of the constraint which it has put on the interest rates. Presumably at some time Switzerland will decide that it cannot protect its currency from strengthening any further by reducing the interest rate, so your bet on the Euroswiss may come down to a question of when this will happen, and what involvement the Swiss National Bank will decide to have, that is whether it will continue to try its hardest to influence the exchange rate, or allow it to find its own level for a time.
To continue with the spread bet example, perhaps some government action or inaction will allow the price to go to 9982 – 9983, a level that it was on about a year ago. If this happens, and you decide to close your bet to capture what profit you can, this is how you would work out how much you won: –
- You placed your short bet at 9994, the selling price.
- Your spreadbet closed at 9983, the buying price.
- Therefore you have made 9994 less 9983 points.
- That works out to 11 points.
- Your spreadbet was for £15 per point.
- You have won 11 times £15.
- Your total profit is £165.
If you misjudged the situation, and the Swiss National Bank continues to control the interest rate to a level that will discourage investment, and thereby keep the value of the Swiss franc down, then you may have to close the bet at a loss. One of the secrets of successful spread betting is to know when you need to do this. Even if you are only correct half the time on the direction of the bet, as long as you can keep your losses to a lower amount than your gains, you are still able to make a profit.
So assume that the Swiss National Bank continues to turn the screws, reducing the interest rate, so the spread bet quotation goes up to 9998 – 9999, at which point you decide to close the bet. While it seems that you could not lose more than this, because of the mechanics of an interest rate spread bet, looking at the chart you can see that this index has been more than 10,000 in the past, and you want to avoid that happening again while you hold the bet.
- You placed your short bet at 9994, the selling price.
- Your bet closed at 9999, the buying price.
- Therefore you have lost 9999 less 9994 points.
- That works out to 5 points.
- Your bet was for £15 per point.
- You have lost 5 times £15.
- Your total loss is £75.
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