Commercial arbitrage starts by creating a commercial certificate of deposit (CD) against a commercial loan.
Negotiate with your bank a commercial loan by creating a CD with the capital you already have in the corporate account. This is when the arbitrage technique really starts working and where the “secret of bankers” really lies.
Under the terms and conditions of the loan, the CD will become a credit guarantee. Obviously, the cost of borrowing will be higher than the savings rate you will get. This is called the interest spread or net interest margin, and this is how banks really make their money.
For example, if your borrowing rate is 6% and your savings rate is 1%, then the spread is 5% (6 – 1 = 5). This is called the spread, which is the difference between our rates expressed as the “delta.” This Delta is what we want to beat as our benchmark.
Delta = Borrowing Rate – Saving Rate
Arbitrage Leading Conditions
Examining these leading conditions we can finally understand how it is that bankers never lose.
- First, there are leading and transactions fees. “Fees are the cost of doing business.”
- Second, there is the difference between savings and leading rates. “Lend high, pay low.”
- Third, there are the guarantees. If you default on your loan, the banks keeps the CD as collateral against any amount you owe (banks usually don’t lend 100% of the CD). After more fees and closing out the debt, the bank will return to you any amount left; if there is any. Since most loans don’t default within their first month, the bank also gets to collect the interest on the debt before defaulting. Remember, bankers are always making sure that they never lose money in any transaction but make a profit instead.
- Lastly, please verify this information because banks’ regulations are changing every day. According to modern monetary mechanics (fractional reserve banking and lending), for every dollar of deposits that the banks hold (customers’ savings and other assets), they can lend $10, effectively giving bankers the leverage ratio of 10:1. Leverage is another superpower of bankers that you will learn to exploit.
This is why bankers never lose. Because they use the spread arbitrage strategy on you. They take your regular savings yield at 1% and lend it out to other clients at higher rates 6% and they get to do this 10 times over. Not only, they do this with regular clients like you and me but also to the government.
Banks borrow from the Federal Reserve at low rates and then lend that same money to the Department of Treasury (Treasury Bills), profiting from the spread.
The Intrest Rate Arbitrage Trade
You may believe that you are in a disadvantage to bankers, paying fees and higher rates. But in fact, if you use the arbitrageur investing system, you can also win. Say, for example, that you are given a commercial loan at 6.0% and a commercial CD yielding 3.0%.
- First, you decrease your borrowing cost by the delta from 6% to 3%. Now, your profits start when you produce investment returns higher than that 3%, which is your benchmark.
- Secondly, since you are a corporation, all the interest paid on the debt becomes tax expenses and deductions.
- Lastly, there is the power of compounding returns. Whereas the amount of interest, you pay on your loan decreases due to amortization, and the amount paid to you on your CD increases due to capitalization. The best way to explain this phenomenon is a graphical illustration. Observe the following case over 15 years; with a $100,000 CD yielding at 3% and a $100,000 loan at a rate of 6%.
The charts above shows that at the end of 15 years you would have received more interest from the bank than what you paid it. As you can see even if you do nothing else, you will have a profit.
To understand this trade step-by-step and to download this arbitrage calculator for yourself consider investing in the arbitrageur system, by clicking here>>