Question:
Could someone recommend a good book to me on carry trades in forex? Thank you for your consideration.
Answers:
A Carry Trade is borrowing in one currency with VERY LOW interest rates, and investing that in a currency with higher interest rates.
The most popular was the YEN carry trade. For long time the Bank of Japan had the YEN at 0% interest rates. You could borrow and then drop it in Euro's or Dollars at 4-5% interest. You could also invest in stocks as well.
The truth is, the rates have to be very low to make money because you have to pay for the foreign exchanges. Remember you have to change from YEN to ESD or EURO. Then buy your bonds/stocks/CD's.
Then you have to change that money back from YEN to EURO/USD.
I currently don't believe there is enough of a differential between the EURO and the USD to make a carry trade worthwhile.
Also, if either currency moves and the interest rate moves quite a bit, you will find yourself screwed in a very bad way.
there is really nothing special you need know know regarding carry trade. As i know GBP/JPY (liquid) is the most profitable in carry trading. Basically you go long and hold it. This way when the roll over happens you get credit because you hold the currency with a bigger interest rate. Make sure you ask about the rolls you would get with the forex firm you are opening account with because sometimes you have bad rolls by default.
Any Banker will tell you. It is not complicated. Basically, you borrow a low interest rate currency, sell it and buy a high interest rate currency and deposit it. You wind up with a loan and a deposit. and then hope and pray that the exchange rate doesn't go against you. It is not something that you want to do. The only ones who do this are dealers and they use millions of Dollars and only for a short period. If you do not know where the exchange rate is going it is best to stay away.
What is a currency carry trade? The currency carry trade, known simply as carry trading is a strategy where the investor sells a currency with a relatively low borrowing rate and uses the borrowed funds to purchase another currency with a higher interest rate differential. An investor using this strategy attempts to take advantage of the interest rate differential.
A good example of a currency susceptible to carry trades is the Japanese Yen,whose borrowing rate is at 0.5 percent.
Eg. A trader borrows 2,000 Yen from a Japanese Bank the converts it to Australian Dollars then buys a bond for the equivalent amount. Assuming that the bond pays 5 percent and the Japanese interest rate is 0.5 percent, the trader expects a 4.5 percent profit under the condition that that the exchange rate between the two nations don't change.
Carry trading is risky due to volatile movements of the exchange rates. Using the above example, if the Australian Dollar depreciates against the Japanese Yen, the trader is set to make a loss. Carry trade transactions are usually done with leverage, therefore a small movement in exchange rates would result in massive losses of funds.
The Japanese Yen in recent years had been susceptible to carry trade due to its relatively low borrowing rates.
This article contents is post by this website user, HiAnswer.com doesn't promise its accuracy.
More Questions & Answers...