Question: You Can Profit From The Answer, Too.

[ByLoSellHi]

How Do I Borrow Yen And Invest In The U.K. Pound?

Someone please explain to me how I can participate in this "carry trade."

Thanks.

In Japan by contrast, the central bank kept its main borrowing cost at 0.25% last month, while in the US the key rate was left on hold at 5.25% earlier this month after 17 consecutive increases between June 2004 and June this year.

Traders said that many investors were borrowing money in Japan, where money was now relatively cheap, and buying into the pound to benefit from the higher interest rates that were on offer in the UK.


http://news.bbc.co.uk/2/hi/business/6291343.stm

 

[ByLoSellHi]

No one here knows the answer?

 

[Wayne Gibbous]

There was a whole thread in the Forex forum about Electric Savant's carry system.

I'm sure there is a bunch of other posts there too about carry trades. Sorry, I don't trade spot so I don't know all the details.

But basically you just set up the pair. Short the low interest - to pay the other. They are not risk-free.

 

[nkhoi]

no money, Electric has moved on to greener pasture.

 

[aeliodon]

Quote from nkhoi:

no money, Electric has moved on to greener pasture.

He blew up? I could tell he was going mental on us all.

 

[aeliodon]

Quote from ByLoSellHi:



In Japan by contrast, the central bank kept its main borrowing cost at 0.25% last month, while in the US the key rate was left on hold at 5.25% earlier this month after 17 consecutive increases between June 2004 and June this year.

Traders said that many investors were borrowing money in Japan, where money was now relatively cheap, and buying into the pound to benefit from the higher interest rates that were on offer in the UK.


http://news.bbc.co.uk/2/hi/business/6291343.stm

I've heard of this carry trade for a very long while, but I never really looked into its detailed workings. It almost seems to good to be true: borrow at .25% and earn at 5.25%. The currency risk probably can't even be that much as BOJ frequently intervenes to prevent the yen from getting to strong.
You'd think everyone and their mother would be all over this trade.

 

[aeliodon]

I'd like to borrow yen to buy the 2007/2008 Honda Accord when it comes out. And I'd like to borrow yen to buy a home too somewhere down the line. In fact, who needs credit cards when you can just borrow yen for all your cash needs.

 

[ByLoSellHi]

Quote from Wayne Gibbous:

There was a whole thread in the Forex forum about Electric Savant's carry system.

I'm sure there is a bunch of other posts there too about carry trades. Sorry, I don't trade spot so I don't know all the details.

But basically you just set up the pair. Short the low interest - to pay the other. They are not risk-free.

Right, but I don't know how the mechanism works.

I can't borrow money from a Japanese bank, and then have it wired to my U.S. bank, and then have the yen converted to dollars...

...not to my knowledge at least.

Quote from aeliodon:

I've heard of this carry trade for a very long while, but I never really looked into its detailed workings. It almost seems to good to be true: borrow at .25% and earn at 5.25%. The currency risk probably can't even be that much as BOJ frequently intervenes to prevent the yen from getting to strong.
You'd think everyone and their mother would be all over this trade.

Exactly. The risk would be if the currency exchange swung against you, but it would have to be by a margin of the difference in the interest rate to matter (basically 5%), and on a perpetual basis.

I am assuming one needs an intermediary to make a carry trade happen.

 

[nkhoi]

Quote from aeliodon:

He blew up? I could tell he was going mental on us all.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=85212

Quote from ElectricSavant:

Drawdown is running at -11.14% with a combined 2.5 lots open in four positions, currently trading this manually...

22.5% ROI on a $4,651.79 investment in 6 days....$5,698.57 is the current balance in the live account...

Stay Tuned next month for lot size trading with live trade calls and commentary...

This is a keeper.

Michael B.

P.S. AND YOU GUYS CAN DO THE SAME!!!!!! No holds barred....No Stifling...They cannot stop us now...You now have become dangerous and will soon learn, that it is now about keeping everybody happy...

 

[illiquid]

Quote from ByLoSellHi:
Exactly. The risk would be if the currency exchange swung against you, but it would have to be by a margin of the difference in the interest rate to matter (basically 5%), and on a perpetual basis.

I am assuming one needs an intermediary to make a carry trade happen.

You could just sell a JPY contract and buy 2 GBP contracts on globex, the carry interest is embedded in the contracts.

You do realize that the carry rate amounts to a few pips per week, while the exchange rate between the 2 currencies can move several hundred pips in the same time span. Certainly, those who have put the trade on for the past several months have seen the exchange rate move markedly in their favor, but things can change quickly.

The carry trade is pretty much a game of musical chairs. If you happen to conclude that long pound and short yen are good positions to keep on their own, (or can anticipate when the street is incorrectly anticipating relative hawkishness between the 2 central banks, as in the past couple weeks) then just consider it a gbp/jpy trade. Otherwise, there is no inherent "edge" to owning the pair (the interest differential having been priced in).

Ask the holders of the AUD/JPY trade how many weeks' carry was lost in tonight's session, and you might think twice.