Can anyone explain a carry trade?

T

tradersadvocate

Hey everyone,

I've read a bit on different websites about carry trades. Can someone (without any financial motive) explain in detail how it works and how you could possibly be making money on it?

Any input appreciated.
 
the most common carry trade referred to in the media over the recent years is the japanese yen carry trade. interest rates in japan were 0% for A long time. i think they are a little bit more now - maybe a 1/4 percent or so... im not sure exactly but the rates are negligible.... in the us - the rates are 5+%.... so, borrow a bazillion dollars from japan for free and buy a bond in the us or pork bellies or whatever you want.... basically taking advantage of interest rate differentials....
 
The interest rate for Currency A is 1%

The interest rate for Currency B is 5%

You borrow A (paying the borrowing rate of 1%) to sell A, and invest the proceeds, which by definition is Currency B, in a bank account (earning 5%).

You earn 5%-1%=4% if everything stays the same.

Your risk is that Currency A appreciates relative to Currency B (or vice versa) so much so that the money you make on your interest rate differential is wiped out.

Sometimes it actually gets interesting. Back more than 10 years ago the trade was to borrow Turkish Lira (pay 80%) to buy Turkish T-Bills (earn 100%). Government was depreciating their currency by a constant 80% per year, while subsidizing the purchase of their Bills. Guaranteed 20%, right? Worked great until that 80% became 500%.
 
Broker can change the interest at any tame, and make it work against you. That is what FXsolution did with my short on GBP-USD. While other brokers are paying interest, they are charging, and charging BIG.
 
Quote from jerry11901:

Broker can change the interest at any tame, and make it work against you. That is what FXsolution did with my short on GBP-USD. While other brokers are paying interest, they are charging, and charging BIG.
More...

Then why are you using them?
 
Educate? What kind of book is saying that only FXsolution is charging interest on open trades don’t mater if you are long or short, after you open position?
 
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