Turkish Lira Swap 20-Year Compound Interest Simulation: Ultra-Long-Term Analysis

Fundamentals of Turkish Lira Swap Investing

The Turkish Lira against Japanese Yen (TRY/JPY) is one of the currency pairs offering the highest swap points in the FX market. With the Central Bank of Turkey's policy rate exceeding 40% (as of 2024), the swap income derived from the interest rate differential with Japan appears attractive to many investors.

However, the essence of high-yield currency investing lies in the trade-off between "interest income" and "exchange rate fluctuations." By examining compound interest over an ultra-long period of 20 years, we reveal the true nature of this investment approach.

How Swap Points Work

Swap points in FX trading are awarded daily as an interest rate differential adjustment between two countries.

Item	Description
Trigger Condition	When positions are rolled over to the next day
Calculation Basis	Calculated based on policy rate differential between two countries
Award Timing	At NY close (early morning Japan time)
Wednesday Exception	Three days' worth awarded including weekend

Basic Principle of Compound Interest

Compound interest with swap points refers to reinvesting received swap income and gradually increasing positions. Theoretically, the final asset can be calculated with the following formula:

Final Asset = Initial Investment x (1 + Annual Rate)^Years

For example, at 20% annual rate compounded over 20 years, the principal would theoretically grow to approximately 38 times. However, this simple calculation does not include the critical variable of exchange rate fluctuations.

20-Year Historical Analysis of TRY/JPY

By analyzing the past 20 years of Turkish Lira versus Yen movements, we can understand the reality of swap investing.

Exchange Rate History

Period	TRY/JPY Rate	Major Events
2004	~80 yen	Before new Turkish Lira introduction
2007	~95 yen	Peak level
2008	~55 yen	Lehman Shock
2013	~52 yen	Taper tantrum concerns
2018	~16 yen	Turkish currency crisis
2021	~8 yen	Erdogan's rate cuts
2024	~4.5 yen	Rate normalization begins

Shocking Fact: 95% Value Loss

From the 2007 peak of approximately 95 yen to approximately 4.5 yen in 2024, the Turkish Lira against Yen has lost approximately 95% of its value. This equates to an average annual decline of approximately 17%.

If 1 million yen was used to purchase Turkish Lira in 2007, considering only exchange rate movements, the value in 2024 would be approximately 50,000 yen.

Swap Income Offset Calculation

Assuming an average swap yield of 15% annually over the past 17 years, let's calculate the offset against exchange rate decline.

• Cumulative swap income (compounded): Approximately 10.5x initial investment
• Value decrease due to exchange rate: Approximately 95% decline from initial investment
• Final profit/loss: Approximately 50% loss

This result demonstrates the harsh reality of high-yield currency investing.

Compound Interest Simulation

For a more detailed simulation, we establish specific assumptions.

Simulation Parameters

Item	Setting
Initial Investment	1 million yen
Leverage	3x (assuming 400% margin maintenance)
Annual Swap Yield	20% (including leverage)
Swap Reinvestment	Once annually (additional purchase at year-end)
Investment Period	20 years

Ideal Scenario: No Exchange Rate Fluctuation

Let's calculate the compound effect assuming constant exchange rates.

Years Elapsed	Accumulated Assets	Cumulative Return
Year 5	2.49 million yen	+149%
Year 10	6.19 million yen	+519%
Year 15	15.41 million yen	+1,441%
Year 20	38.34 million yen	+3,734%

Under ideal conditions, assets would grow more than 38 times over 20 years. However, this figure is unrealistic.

Historical Performance-Based Simulation

Let's run a simulation incorporating actual exchange rate movements over the past 20 years (assuming -10% annually).

Years Elapsed	Swap Accumulation	Exchange Impact	Final Valuation
Year 5	+1.49 million yen	-41%	1.47 million yen
Year 10	+5.19 million yen	-65%	2.17 million yen
Year 15	+14.41 million yen	-79%	3.23 million yen
Year 20	+37.34 million yen	-88%	4.60 million yen

Even accounting for exchange rate decline, the return after 20 years is approximately 4.6 times. However, this represents an average annual return of approximately 8%, not significantly different from US stock index investing.

Three Scenario Projections

We project investment outcomes over the next 20 years using three scenarios.

Optimistic Scenario: Turkish Economic Normalization

Assumptions:

• Policy rate: Gradually declining to around 10%
• Inflation rate: Stabilizing in single digits
• Exchange movement: Moderate decline of approximately -3% annually
• Swap yield: 8% annually (with 3x leverage)

Projected valuation after 20 years: Approximately 4.2 million yen (4.2x)

Neutral Scenario: Status Quo Maintained

Assumptions:

• Policy rate: Fluctuating between 20-30%
• Inflation rate: Remaining elevated at 30-50%
• Exchange movement: Continued decline of approximately -8% annually
• Swap yield: 15% annually (with 3x leverage)

Projected valuation after 20 years: Approximately 2.5 million yen (2.5x)

Pessimistic Scenario: Currency Crisis Recurrence

Assumptions:

• Capital outflow due to political turmoil
• Hyperinflation
• Exchange movement: Steep decline of -15% or more annually
• Possibility of margin call during the period

Projected valuation after 20 years: Less than 500,000 yen (principal loss)

Ultra-Long-Term Holding Risk Factors

When holding Turkish Lira for an ultra-long period of 20 years, the following risks must be recognized.

1. Currency Risk (Most Critical)

The Turkish Lira has declined over 95% against major currencies over the past 20 years. If this trend continues, losses may occur regardless of how high swap income is.

2. Political Risk

Under Turkey's presidential system, monetary policy is susceptible to political influence. President Erdogan's belief that "high interest rates are evil" led to rate cut interventions that triggered the 2021 currency crisis.

3. Inflation Risk

Turkey's inflation rate exceeded 80% in 2022 and remains in the 60% range in 2024. High inflation creates continuous downward pressure on currency value.

4. Geopolitical Risk

Turkey is positioned at the intersection of the Middle East, Russia, and the EU, exposing it to geopolitical risks. The Syrian situation, relations with Russia, and EU membership issues all create diplomatic risks affecting the exchange rate.

5. Liquidity Risk

During market turmoil, there's risk of significant spread widening or trading suspension. During the 2018 currency crisis, some FX brokers temporarily suspended Turkish Lira trading.

6. Margin Call Risk

With leveraged positions, margin calls may be triggered by rapid exchange rate movements. Weekend gaps can result in losses exceeding expectations.

With 3x leverage, a margin call is triggered when the exchange rate drops approximately 33%. The Turkish Lira has historically dropped over 20% in a single day, making this risk significant.

Practical Investment Strategies

For those investing in Turkish Lira swaps, we propose practical strategies to mitigate risk.

Strategy 1: Low Leverage Management

By limiting leverage to 1-2x, margin call risk can be significantly reduced.

• 1x leverage: No margin call until exchange drops 100% (to 0 yen)
• 2x leverage: Margin call when exchange drops 50%
• Recommended: Maintain margin maintenance rate above 500%

Strategy 2: Combination with Diversified Investment

We recommend limiting Turkish Lira investment to a portion of the overall portfolio.

Risk Tolerance	Turkish Lira Allocation	Other Allocations
Conservative	1-3%	Stocks, bonds, other currencies
Moderate	3-5%	Diversified portfolio
Aggressive	5-10%	High-risk asset focused

Strategy 3: Regular Profit Taking

Rather than reinvesting all swap income, manage risk by regularly taking partial profits.

• Withdraw 50% of swap income monthly or quarterly
• Reinvest only the remaining 50%
• Withdraw principal equivalent once accumulated profits exceed principal

Strategy 4: Combining with Technical Analysis

Monitoring long-term trends and temporarily reducing positions during major downturns is worth considering.

• Monitor monthly moving averages (12-month, 24-month)
• Reduce position to 50% during clear downtrends
• Increase again when trend reversal signals appear

Conclusion: Realistic Assessment of 20-Year Investment

Here are the conclusions drawn from the 20-year Turkish Lira swap investment simulation.

Key Findings

1. Compound effect is significantly diminished by exchange rate decline: Theoretical 38x becomes realistically 2-5x
2. Past performance is challenging: Underperformed US stock index investing over past 20 years
3. Future prediction is difficult: Heavily dependent on Turkey's political and economic situation
4. Risk management is essential: Low leverage, diversification, and profit-taking are critical

Investment Decision Points

Turkish Lira swap investing is suitable only for investors who meet the following conditions:

• High risk tolerance
• Ability to follow emerging market economic and political developments
• Can limit allocation to a portion of portfolio (5% or less)
• Can accept principal loss
• Can hold patiently for 20 years

Final Assessment

The dream of "passive income through high-yield currency swap investing" is refuted by real data. Turkish Lira investing should only be pursued as a high-risk, high-return asset with proper risk management. Even over an ultra-long 20-year period, expected returns are comparable to stock investing, while risks are far higher.

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If considering swap investing, we recommend starting with small amounts and understanding the balance between exchange rate fluctuations and swap income through actual experience. Desktop simulations differ significantly from actual investment experience.