Buy a foreign denominated bond with a foreign currency?

Would it be profitable to buy a foreign denominated bond with a differant foreign currency. Say a short term bond HIGH interest rate bought with a differant foreign currency that is volatile?

Public Comments

1. Oh sure - and add to your risk even more.
2. Usually when interest rates are high, it means that the currency is of the respected country is becoming devalued. I would try to stay away from investing in bonds that are on other currencies. It will only add to your risk!
3. Answer to your question is - there is exchange rate risk which has to be kept in mind, but there are ways to make the exchange rate risk insignificantly small. Let me give you one possible strategy with an example. Buy an Indian one year bond yielding 8%. You hv to pay Rs 100 to buy the bond. Buy Rs 100 against USD @ 44.5 Rupees/Dollar. You will get Rs 108 at the end of one year and you need to sell it. The risk you run is that Rupee will depreciate against the dollar. To manage this risk, buy a USD Call/INR Put for Rs 108 with a maturity of 1 year with a strike price of Rs 44.5. Let this option also have a knock out at , say 50(Meaning the option becomes worthless if ever USD/INR gets to 50 anytime in the next one year). Sell a USD Put/INR call at 44.5. The net premium you pay should be zero or close to zero. Finetuning the knock out level will ensure premium is zero. Risk you run is that USD/INR will touch 50 at some point of time during the next one year. A reasonably remote possibility if you ask me unless something seriously goes wrong with India. Think about similar strategies involving NZD/USD.