INTERNET TRADING AND THE RATE OF RETURN ON CROSS-

BORDER INVESTMENTS. SIMULATION WITH RWANDA, UGANDA

AND US TREASURY BILLS FOR THE PERIOD 2001-20051.

By NSABIYUMVA Pastor Bonus, Byumba Polytechnic Institute

With thanks, the study received insights from (1) Mr. Beenunula Nunumisa, the MD of Forex Africa.com where the
researcher did a 3-month basic training in Internet Trading. Mr. Beenunula holds a Master’s of Finance from the New
York Institute of Finance and has extensive professional knowledge in the field of Internet Trading. He is currently the
Governor of the Lake Victoria Free Trade Zone (LVFTZ), where he intends, among other things, to create the Financial
Markets University of Africa and (2) Prof. Dr. Thomas Walter, the supervisor of the research, very knowledgeable in
the subject and one of the sharpest minds I have ever seen. He is currently the Director of the MUBS Research Centre.

The study was done with a MUBS scholarship, received with thanks under the leadership of Prof. Waswa Balunywa,
MUBS Founder Principal and Dr. E. Rwamasirabo, former Vice-Chancelor of the National University of Rwanda,
where the researcher served as a lecturer for a seven-year period.

INTRODUCTION

In Less Developed Countries (LDCs) such as Rwanda and Uganda, domestic short-term
investments yield very low if not negative real returns (Bernstein, 2002). Moreover,
securities markets instruments and intermediaries, when they exist, are still in their early
stages. This context generally discourages institutions and individuals from investing,
thus often resulting into keeping temporarily large sums of money on unproductive
accounts, which may translate into overliquidity for the economy (BNR, Annual Report
2004).

Amid these investment bottlenecks, new opportunities have come out with the quick
diffusion of new information technologies that are slowly leading to the advent of a
global village. Along with e-mail and pornography, the investment industry is listed
among the most successful uses of the Internet (“E-trends”, 2001), with the emergence of
Internet-based financial brokers in the late 1990s (Mishkin & Eakins, 2000). These
enable securities trading on Internet, thus availing to anyone is connected the huge global
markets and their leverage capabilities at fingertips (Abell, 2000). While for Developed
Countries (DCs) lower transaction and information costs are considered as the main
benefit of e-trading (“E-trends”), factors rendering it attractive for LDCs need to be
further investigated.

In this context, there is an interest to consider whether and investigate why cross-border
short-term investments, enabled by the newly available Internet trading technology may
constitute, for an investor from LDCs, a viable investment alternative that can provide a
better rate of return.

Many studies have been made to analyse and contrast returns from various investment
strategies. For example, controversial tests compared returns obtained using different
technical analysis strategies (Reilly, 1989; Sharpe, et al., 1999). This study uses similar
research designs and simulations:

1
See also NSABIYUMVA, P.-B. (November 2006). Internet Trading and the Rate of Return on Cross-
Border Investments. MBA Project Research Report, Makerere University Business School (MUBS),
Kampala.
 2

(a) To compare returns from offline domestic LDC-based (Rwanda/Uganda) to those

from online international DC-based (USA) short-term investments (Table 1).
(b) To analyse empirically the strength of the relationships that build repatriated DC-
based returns in a move to try to understand them more (Table 1, scenario 4).

In the following lines, we shall expound on the methodology used to carry out the study,
before presenting and discussing the results obtained.
 3

METHODOLOGY

SYNTHETIC VIEW OF THE RESEARCH PLAN

TABLE 1. INVESTMENT SCENARIOS FOR COMPARISON AND RELATIONSHIPS ANALYSIS

LOCAL INVESTMENTS CROSS-BORDER INVESTMENTS
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4
Place of Investment Rwanda Uganda USA USA
Investor’s Residence Rwanda Uganda Rwanda/Uganda (*) Rwanda/Uganda (*)
Security Targeted 3-MONTH GoR TBs 3-MONTH GoU TBs 3-MONTH US TBs 3-MONTH US TBs
Data Collection Secondary Secondary Secondary Secondary
Period 2001-2005 2001-2005 2001-2005 2001-2005
Initial Amount Invested Equivalent of 10,000 Equivalent of 10,000 10,000 USD 10,000 USD
USD USD
Investment Arrangements • Local Offline Broker • Local Offline Broker • Online Broker (without • Online Broker
(without leverage) (without leverage) leverage) (with leverage)
• Strategy: Buy and • Strategy: Buy and • Strategy : Buy and Hold • Strategy: 200-day moving average
Hold Hold
Transaction Cost (TC) TC1 TC2 TC3 TC4
TC Assumptions TC1≈TC2≈TC3≈TC4≈0 TC1≈TC2≈TC3≈TC4≈0 TC1≈TC2≈TC3≈TC4≈0 TC1≈TC2≈TC3≈TC4≈0
Risk Assumptions Risk Free Risk Free Risk Free Controlled & Minimised Risk
Expected Rate of Return/ RR1RWF RR2UGX RR3RWF/RR3UGX RR4RWF/RR4UGX
Dependent Variable
Hypotheses Tests Test 1: RR3RWF ≤ RR1RWF; Test 2: RR3UGX ≤ RR2UGX; Test 3: RR4RWF ≤ RR1RWF; Test 4: RR4UGX ≤ RR2UGX
Independent Variables Interest Rate Interest Rate • Interest Rate • (Interest Rate –Basic Return-)
for • Exchange Rate • Interest rate fluctuations (trading
Empirical Relationships Fluctuations strategy gain/loss)
Analysis • Exchange Rate Fluctuations
(Scenario 4) • Leverage Effect (initial margin
requirement = 50%, maintenance
margin = 0% and margin loan rate =
TB interest rate)
(*) Processing the investment differs only at benefits repatriation
Highlighted: main differences from previous scenario
 4

RESEARCH DESIGN

The study is mainly quantitative. It draws on longitudinal ex-post simulations. Additionally,

the researcher used participative observation by training in online trading and mingling with
real Internet Traders at Forex Africa.com Ltd over a three-month period.

DATA SOURCES AND COLLECTION METHODS

Population
The population at study is market securities. Past issuances worldwide being very many,
the population size was considered infinite.

Sampling Strategies
Three systematic samples were drawn from three countries selected for ease of data
availability (convenience sampling): Rwanda, Uganda and USA. The samples comprise
3-month Treasury Bills (TBs) issued/traded during the five-year period 2001-2005. The
following table gives the samples’ details.

TABLE 2. THREE-MONTH TBs SAMPLES AND THEIR SIZES

SCENARIO COUNTRY SIZE PERIODICITY

1 Rwanda 20 Quarterly
2 Uganda 20 Quarterly
3&4 USA 1248 Daily

For scenarios 1 and 2, the eligible TBs issues were drawn at the beginning of each quarter for
five years (4*5=20). For scenarios 3 and 4, the sample is composed of daily data for each of
the effective trading days per year for the five–year period 2001-2005. The use of the same
annual reference period for all samples made it possible to compare returns from samples of
different sizes.

Data Collection Methods
The researcher collected series of TBs’ end-of-day interest rates as well as exchange and
inflation rates from BNR/BOU “offline” documentation and the US Federal
Reserve/BNR/BOU websites. Other data series needed have been obtained from simulations.
 5

PROTOCOL FOR INTERNET TRADING SIMULATIONS

The trading strategy that has been used for the Internet trading simulations is the following:

TABLE 4. PROTOCOL FOR ONLINE TRADING SIMULATIONS

No. SIMULATION STEPS
1 Compute a 200-day moving average with closing interest rates for the
considered TBs and period.
2 Compute a 15-day moving average with closing interest rates for the considered
TBs and period. This smoothes the interest rates curve.
3 Take today’s 15-day moving average and divide it by the 200-day average to
form a short-to-long interest rate ratio.
4 Buy tomorrow when a ratio grater than 1 is obtained. Otherwise, sell.
5 Repeat the above steps tomorrow after closing.

Source: Adapted from Sharpe, et al. (1999)

Along with the above process, calculate the annual rate of return at end of each year.
Calculate the overall 5-year arithmetic and geometric mean rate of return (Reilly, 1989) at
the end of the test period. For scenario 4, the simulation of online trading over 1248 days
meant calculating the value of the investment:
(a) At beginning-of-day (value of investment at buy or sell decision), using yesterday’s
closing interest rate, with the assumption that the interest rate will not vary today; and
(b) At end-of-day, thus incorporating the interest rate fluctuation of the day. This was
processed depending on the outcome of the strategy used to predict the interest rate move,
and hence capture the differential as a benefit or a loss.

RELATIONSHIPS SERIES COMPUTATION

For the relationships analysis, three independent variables were retained and processed into
three data series as follows:

Interest Rate Fluctuations or Trading Strategy Gain/Loss, calculated as daily variations of
the interest rate (which can eventually be turned into gain/loss through trading strategy2);

Exchange Rate Fluctuations, computed as daily variations;

The Leverage Effect, computed as daily variations of returns due to financial leverage,
from simulation under following assumptions: initial margin requirement
m = 50%, maintenance margin = 0% and margin loan rate l = TBs’ interest rate.

The rate of return constitutes the independent variable. After benefits repatriation, the foreign
x
return (rf) becomes: rT = (1 + r f ) 1 − 1 , x1 and x0 standing for end and beginning-of-period
x0
exchange rates respectively (Brealey, Myears & Marcus, 2001). This can be expanded to a
[( P − P0 ) + I 1 ] − [l * P0 (1 − m)] x1
leveraged rT = (1 + 1 ) − 1 (Francis, 1991). Within study
P0 * m x0
assumptions, the leverage multiplier becomes (2 - l/i2), with i2 standing for interest rate after
trading strategy is applied; and the leverage effect is (1 - l/i2).
2
The least square statistics used treat equally gains (positive variations) or losses (negative variations).
 6

Following are the cost assumptions under the study (Table 1):

Internet trading minimises transaction and information costs and render them almost
equal for both local offline and cross-border online investments;

The costs of carry for overnight positions (if any) are self-compensating.

DATA ANALYSIS

Comparison of returns rate

Four hypotheses tests were run. Whenever the null hypothesis (H0) is rejected, the foreign
online investment may have attractive returns (HA). The applicable test is the Student t one
tailed.

TABLE 3. HYPOTHESES STATEMENTS

TEST H0: NULL HYPOTHESIS HA: ALTERNATIVE HYPOTHESIS
1 RR3RWF ≤ RR1RWF RR3RWF > RR1RWF
2 RR3UGX ≤ RR2UGX RR3UGX > RR2UGX
3 RR4RWF ≤ RR1RWF RR4RWF > RR1RWF
4 RR4UGX ≤ RR2UGX RR4RWF > RR2UGX

Relationships Analysis
The measure for relationship depth (r2) for scenario 4 was computed using the simple
regression method. A spreadsheet software as well as SPSS statistical package were used.
Multiple regression analysis was found irrelevant; it gives an estimative regression line for a
distribution that is already known.

PRESENTATION AND DISCUSSION OF RESULTS

(A) FINDINGS

The investments scenarios results can be summarised as follows.

TABLE 5. SUMMARY OF THE SIMULATION RESULTS
SIMULATION RESULTS
SCENARIO COUNTRY Rate of Arithmetic Geometric Real Geometric
Return Mean Mean Mean
1 Rwanda RR1RWF 10.6% 10.52% 2.96%
2 Uganda RR2UGX 10.3% 9.63% 3.27%
3 USA RR3RWF 6.91% 6.71% 0.20%
RR3UGX 2.05% 1.84% -2.44%
4 USA RR4RWF 149% 68% 57.64%
RR4UGX 131.8% 60% 52.98%

Obviously, the returns from scenario 4 appear very interesting with real returns ranging from
53% and beyond.
 7

The results of the hypotheses tests are the following (α = 5%):

TABLE 6. SUMMARY OF HYPOTHESES TESTS RESULTS
Test Null Hypothesis Var 1 Var 2 Df t Stat t Cr. one tail Decision
1 RR3RWF ≤ RR1RWF 0.0208 0.0002 38 - 3.659 1.6860 Accepted
2 RR3UGX ≤ RR2UGX 0.0613 0.002 38 - 0.013 1.6860 Accepted
3 RR4RWF ≤ RR1RWF 1.5831 0.0002 38 1.708 1.6860 Rejected
4 RR4UGX ≤ RR2UGX 1.4082 0.002 38 2.094 1.6860 Rejected
Source: Adapted from Excel t-Test Output: Two-Sample Assuming Equal Variance

The null hypotheses are accepted when comparing local and cross-border “offline buy and
hold” investments (tests 1&2). It is however rejected when contrasting local “offline buy and
hold” against international “online traded and leveraged” investments (tests 3&4), thus
indicating that the latter may be more attractive than the former.

The results from Spearman correlation for each independent variable, at a degree of
significance of 5% are presented in the following table.
TABLE 7. SUMMARY OF CORRELATION RESULTS
Dependent Variable RATE OF RETURN IMPROVEMENT (RWF/UGX)
Scenario (4) Rwanda-Based Investor Uganda-Based Investor
2
Independent Variables r r r r2
1. Interest Fluctuations 0.69 0.47 0.68 0.47
2. Leverage Effect 0.84 0.70 0.84 0.70
3. Forex Fluctuations 0.07 0.005 0.12 0.014

Under the correlation model obtained, both for the Rwanda and Uganda-based investors,
leverage alone explains 70% (r2) of the return improvement, whereas interest fluctuations or
trading strategy can explain only up to 47%. The exchange rate explains as little as 0.5% and
1.4% for the Rwanda and Uganda-based investors respectively.

OTHER FINDINGS

The 200-day moving average trading strategy used was able to predict only 45% of the
market interest rate fluctuations’ direction (up or down).

Simulations with the LIBOR and the reported US inflation rates taken as margin loan
rates while trading in US TBs resulted into driving the investor out of the market.

Computing “offline, local, buy and hold” investments and “online traded, unleveraged
cross-border” hinted that compounding for the offline returns was done on a term basis
because the securities involved were 3-month TBs, whereas compounding was done on a
daily basis for the online investment. In the latter case, if a superior strategy was used, the
power of daily reinvestment would have propeled returns to astonishing highs.
 8

(B) DISCUSSION

Comparison between Offline Cross-Border and Offline Local Investments

The tests 1 and 2 compared the rates of return of two simulated ex-post investments in
GoR/GoU and USA 3-month TBs for the five-year period 2001-2005, using both the buy and
hold strategy. The t value was not significant and the null hypothesis was accepted.
Therefore, as far as the research can tell, the returns from the cross-border investment in
USA TBs for a Rwanda and Uganda-based investors, respectively 6.71% and 1.84%, did not
outperform the returns from local investment in GoR and GoU TBs, respectively 10.68% and
9.63%.

The main assumption in both tests was that the deterioration of the exchange rate would
prompt for currency gains when a LDC-based investor tries cross-border investment.
Unfortunately, this was not the case, neither for Rwanda nor for Uganda.

However, in modern finance, a cross-border investor can avoid loosing from exchange rate
risk exposure by hedging. The advantage of online investments here can lie in the capacity
for the investor to monitor the exchange rate moves and hedge against loss in value of USD-
denominated assets when the trend becomes obvious. This can be done by various means,
such as buying currency futures, investing in safe haven currencies (e.g. the Swissy) or assets
that may appear negatively correlated with the USD, etc.

Further, real returns of investments in Rwanda, Uganda and USA were computed, hence
factoring in the inflation rate. The real returns in both Rwanda and Uganda TBs were very
close and positive around 3%, whereas the real returns from investments in US TBs were
near 0% or negative. This is in agreement with Ibbotson’s empirical work, which also
concluded that US TBs yield almost no real return with the buy and hold strategy (Francis,
1991).

Comparison between “Online” Cross-Border and “Offline” Local Investments

The tests 3 & 4 compared the rates of return of two simulated ex-post investments in
“offline” GoR/GoU and “online traded” USA 3-month TBs, for five-year period 2001-2005,
with leverage allowance for the latter. For both tests, the t value was significant and the null
hypothesis was rejected. Therefore, as far as the research can tell, the returns from the cross-
border investments in USA TBs made by a Rwanda and Uganda-based investors,
respectively 68% and 60%, outperformed the returns from local investment in GoR TBs and
GoU TBs, respectively 10.52% and 9.63%.

The real rates of returns for the cross-border investment are almost equal and slightly higher
than 50% for both Rwanda and Uganda –based investors.

Apart from the already tested exchange rate variable (tests 1 & 2), two more variables
entered into the game (tests 3 & 4). These are interest rate fluctuations or trading strategy and
leverage. The trading strategy used for the simulations was a long-term 200-day moving
average, plotted against a short-term smoothing 15-day moving average. This is a basic
technical analysis strategy documented in many finance books. During the referred to period
2001-2005, the two curves crossed once in a U shaped trend. The first phase of the period
was therefore a clear “Sell”, whereas the remaining was a “Buy”. With overnight positions
 9

allowed, one would have expected the strategy to predict most of the market moves.
Unfortunately, the study revealed that the strategy predicted correctly only 45% of the market
moves. This proportion being close to the average expected 50%, it can be seen that the
strategy did not outperform the market. This is discussed later in the section “Other
Findings”. The total income obtained from a trader practising the buy a hold, was USD
10,757 against USD 10,760 for the active trader (before leverage). This three-dollar
difference over a five-year period is financially not meaningful. It can therefore be said that
the main mover of the rate of return for the cross-border investments was not the strategy,
nor the exchange rates volatility (as seen earlier, this did not confirm the superiority of
returns on cross-border offline investment) but the leverage. The fact that the strategy used in
the study gives average results has made it possible to clearly watch leverage at work. This is
further analysed with the regression analysis.

Relationships Analysis

The regression analysis lined three independent variables: (a) The Interest Rate Fluctuations
or Trading Strategy Gain/Loss, (b) The Leverage Effect, and (c) Foreign Exchange
Fluctuations. All of them were expressed in percentages as variations from previous day to
following day. The dependent variable was the rate of return. This was expressed as the
percentage variation from the basic rate of return generated by the daily interest rate to the
final rate of return generated after all of the three independent variables entered into the
game. The foreign exchange variable differentiated returns from the Rwanda and the Uganda
scenarios. After testing and regressing, the leverage alone was able to explain more than 70%
of the obtained returns for both Rwanda and Uganda scenarios. Therefore, the main
advantage of online trading from the point of view of LDCs is the access to foreign market
with the possibility to tape into leverage capabilities, otherwise inaccessible. The trading
strategy holds the second position and the exchange rate the last position. The former was
able to explain almost half of the returns (47%) whereas the later explained only around 1%.

Despite these results, it can be seen that, for online trading, strategy is the key. The leverage
capabilities only take to higher levels of gain or loss whatever comes out of the trading
strategy. In the case analysed, trading with leverage produced stunning returns of more than
60% and 130% respectively measured with the geometric and arithmetic averages, this being
around six times the local unleveraged offline returns. The initial investment of USD 10,000
was therefore raised to USD 102,008 at the end of year 5. During the training experience at
Forex Africa.com, it was requested from every trainee an optimum return of at least 4%
consistent return per week from simulated accounts using real market data. If this was
achieved, it would translate into “biblical” returns (Mat, 13:8) of 633% per trading year
(assuming it comprises 250 days). This rate represents 10 times the return obtained with the
simulations on TBs. This difference can be explained by the fact that the trading strategy,
which was a basic one, produced almost no positive return. Furthermore, the simulations
were run on TBs, financially known as risk free assets, from which only a minimum but sure
return is expected.

Another aspect that is worth pointing at is the distribution shape of the relationships spotted
in the research variables. It was seen, on one hand, that capital gains resulting from trading
strategy have a linear relationship to the rate of return. They just add up to the basic interest
rate income. On the other hand, the leverage effect and the foreign exchange fluctuations
 10

have an “exponential” relationship with the returns. To obtain returns after both leverage
and foreign exchange factors, a leverage multiplier and a foreign exchange ratio have to be
used respectively. Therefore, it is clear that these variables have a multiplier effect on the
returns. It becomes of capital importance to capture positively the wild energies of leverage
and exchange rate exposure as failure to do so may deepen tremendously the losses while,
when domesticated by the trader, they multiply returns, hence explaining the potential
“biblical” returns of which trader analysts have the secret.

Strategy prediction capacity

The trading strategy used was based on technical analysis moving averages. It only proved to
predict 45% of the market price movements, which is close to the random-explained 50%
claimed by the efficient market theory. The buy and sell signals were spotted clearly with the
200-day and 15-day moving averages curves. However, it is to be noted that bear markets
comprise price rallies (swings of uptrend movements) and bull markets comprise reaction
days (swings of downtrend movements). From this, the following conclusions were drawn:

Internet trading is complex and moving averages are only trend indicators. More data
analysis is needed to reach higher probability trade decisions.

The use of end-of-day data only hindered the user from other important information such
as the opening rate, the day high and low as well as the day average rate.

Technical analysis instruments, in the best practices, should be complemented by the use
of fundamental analysis, especially economic indicators and socio-political news.

Fixed income versus other securities

Trading in fixed income securities such as Treasury Bills and Bonds can be rewarding with
minimum risks. This is because, if the strategy used gives average results, there will still be
the fixed income to harvest, and leverage can work miracles, leading to very satisfying
results. At worst, the daily loss is only limited to the variations of the implied interest rate.
Fixed income securities prices are naturally not expected to collapse beyond the interest rate.
This is different for more risky but probably more rewarding securities such as stocks,
currencies, commodities and derivatives.

Leveraged trading hidden traps

Though the LIBOR might be the reference for many market borrowing operations, margin
trading in US TBs at that rate would drive the investor out of the market, because obviously,
you would not survive borrowing at a rate higher than what you earn. To be sustainable
therefore, as a rule, the margin loan rate has to be less or equal to the anticipated investor’s
rate of return. This is achievable because modern Internet-based brokers offer margins that
can be as low as 0.5% (http://www.cmgtrading.com). This study equated the TBs’ interest
rate and the margin loan rate, as an assumption, and the results were positive, despite the
unimportant return obtained from strategy alone. However, the trader should be aware that
leverage is a money/risk management tool. There exist various forms of leverage that should
be checked out. Using extreme leverage expands risks to maximum. Because trading is a
probabilistic game, extreme leverage cannot be considered as a prudent practice and should
therefore be avoided. In the same time, it has also been documented that, with margin
trading, when the market price drops or rises for a same amount, calculated losses come
higher than gains (Sharpe, et al., 2000).
 11

The power of compounding

Unlike for offline trading, the re-investment risk bears greater potential for on-line trading
because of daily compounding for almost 260 trading days of the year. This is one huge
advantage of on-line trading. The compounding of re-invested profits even from a very
conservative strategy can be very high.

CONCLUSIONS AND RECOMMENDATIONS

The results from the investment ex-post, online and offline simulations, both for the Rwanda
and Uganda scenarios lead to the following conclusions:

1. When the buy and hold strategy is applied, returns from online cross-border TBs
investments are not significantly superior to those obtained from similar offline local
investments. In the analysed cases, foreign returns were accepted as inferior or equal to local
returns. This was mainly because the assumption of local currencies continuously
deteriorating against strong foreign currencies like the USD did not hold during the analysed
period. It was also assumed that transaction and information costs were almost equal in both
local and international scenarios, which may not be the case. In fact, there exist indications
pointing at local costs being inferior. It is therefore recommended that, in general, unless
predictions of local currency depreciation or some other strategic considerations prevail,
when the conditions for local and international investments are similar, local offline should
be preferred to online cross-border.
2. When an active trading strategy combined with leverage was used, returns from online
cross-border investments were about six times superior to local returns. It is therefore
recommended to Governments, Private Sector and Institutions of Higher Learning to actively
promote professional Internet trading in LDCs as this new opportunity can create new
lucrative jobs, bring to local short-term investors much better returns and hence improve the
general welfare.
3. The results show that, among the variables used, leverage has the strongest relationship
with returns improvement. Alone, it was able to explain more than 70% of the returns.
Therefore, it follows that access to foreign markets with their leverage open offer can be
considered as the greatest advantage of Internet trading to LDCs’ investors. This view
contrasts with DCs’ context where, as mentioned before, transaction and information costs
are believed to be the main benefits of online versus traditional trading. This was assumed
irrelevant for this study right from the research plan. It is hence recommended to LDCs-
based trainees in online trading as well as live traders to study in detail the leverage
conditions offered by online brokers. Leverage can be the key to unleash online returns. If
well managed, margin trading can be very rewarding, as modern Internet-based brokers
require a margin that can be as low as 0.5%. However, to be sustainable the margin loan rate
has to be less or equal to the anticipated investor’s rate of return.
4. The results further reveal that strategy has a fairly strong and linear relationship with
returns. Because leverage acts on strategy output, it is recommended that traders allocate
enough time to strategy improvement as to the key of their carrier success.
5. The results show a very weak correlation between returns improvement and the foreign
exchange fluctuations, due to favourable exchange rates conditions that prevailed during the
tested period. It is nonetheless recommended to cross-border investors to monitor closely the
evolution of the currency of investment. The foreign currency ratio acts as an exponential
 12

factor that has the potential to surprise the investor with bad news or, otherwise, bring in
additional positive returns when market winds are favourable and are managed accordingly.
It has been noted that both leverage and foreign exchange have a multiplier effect. Therefore,
it is of capital importance to capture positively the wild energies of leverage and exchange
rate exposure as failure to do so may deepen severely the losses while, when domesticated
by the trader, they multiply returns, hence explaining the potential “biblical” returns of which
trader analysts have the secret.
6. The use of a basic trading strategy such as the well-documented 200-day moving average
did not help much improving the returns. Traders are hence warned that basic strategies are
only indicative. More sophistication in the market analysis and strategy is needed to arrive at
higher probability trades. If this was achieved, another powerful advantage of online trading,
which is daily reinvestment/compounding, would come into the game in favour of the trader.
7. Trading in fixed income securities such as TBs can be rewarding with minimum risks.
Therefore, beginners in trading can capitalise on fixed income such as Treasury Bonds, while
adjusting their market strategy before trying higher risks securities.

Areas for Future Research

This study was conducted using end-of-day data. A similar research with intraday data,
superior trading strategies and using modern software such as eSignal to run intraday
trading simulations is recommended.

Furthermore, it would be useful to study the correlation between currency volatility and
currency gain/loss. Such work would suggest the ranges of currency volatility that would
give a hint to the investor about the expected currency gain or loss while investing
abroad.

Finally, some government officials may fear that the spread of Internet trading would
hinder local investments. It would therefore be beneficial to analyse the impact on local
economies if online trading was promoted and adopted largely by local LDCs’ investors3.

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3
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 13

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