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.Source: http://www.forextradinghq.com/what-is-a-currency-carry-trade.html
Currency carry trades are investing strategies that involve selling one currency with a lower interest rate and using the proceeds from the sale to buy a different currency that is anticipated to yield a higher rate of interest. This two-pronged approach to buying and selling currencies is essentially an attempt to make a profit based on not only the rate of exchange between the two currencies, but also the difference in the interest rates. When conducted under the right circumstances, a currency carry trade can generate a nice profit very quickly. Along with the exchange of currencies, it is not unusual for the currency carry trade to involve a third action, such as the purchase of a bond. The bond is purchased for the same amount at the currency that was acquired from the proceeds generated by the sale of the base currency. Often, this is an attempt to maximize the amount of return on the interest rate, and to a degree insulate the investor from fluctuations in the currency exchange
A currency carry trade is a strategy by which an investor borrows money in one currency at a low interest rate (in this case the yen) to invest in another currency at a higher interest rate (the dollar) to benefit from the difference between the two. This is as relevant to investors in this region as it is in Europe or the US. ‘); //–> Is this easy money? No, to the extent that the investor who follows this type of strategy bears the rate of exchange risks. In fact, the investor has an obligation to repay his loan in the borrowed currency. If ever that currency appreciates sharply against the currency in which he invested, he can lose a great deal of money. So this type of strategy is generally used by hedge funds that have the advantage to be able to use significant leverage. Some particularly audacious speculators have taken advantage of the current configuration of interest rates to initiate considerably riskier transactions. By investing their yen in more yielding assets (for inst
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 tr
