Carry Trade

The essence of strategy "carry trade" (Carry Trade)

The simplest definition of strategy "Carry Trade" is taking the loan at lower interest rate and investing the funds at a higher interest rate. Thus, profit is the difference between the two interest rates. So in theory, without investing its own funds, we can capitalize on the big win. Strategy could be applied to the Forex market and the bond markets.

In Forex trading speculator borrow money in a currency with low interest rates and buy currency with a higher interest rate. Most often, such as low interest rate currency today using Japanese yen as the country's interest rate is only 0.1%, making it one of the lowest in the industrialized developed world. In comparison, rates in Australia and New Zealand often exceed 6%. Speculators borrow in Japanese yen, you pay an interest rate of 0.1%, and put money in Australian dollars, which gets 7 percent rate. Interest payments are made every day, even if it is not obvious at first glance. All open positions of traders are closed at the end of the day the spot rate, then they are immediately detected again by the intermediary broker. Account speculator is charged or credited to interest payments on the differential between the two rates of interest. This amount represents the cost of transferring the position the next day. It is important to otbelezhem that interest rates are quoted on an annual basis. In case the interest rate spread, the difference between 7% interest in the Australian dollar and 0.1 percent for the yen, which traders will be realized (7% -0.1%) / 365 = 0.0189%.

The ability to trade on margin provided by Forex brokers make the strategy "carry trade" is especially popular. Leverage to trade the currency markets is often 1:100. This allows for a huge profit.

But all this lies a great risk. The biggest danger of course is that the currency you bought suddenly lose value against the one you sold. As we saw the Australian central bank attempted to weaken the Australian dollar, precisely because traders carry significantly increase the price of the currency. The risk of "carry trade" the Forex market can be reduced with the use of stop orders in which speculator pre determined level of loss you can tolerate. This is also the hedge contract with the forwards, but this is likely to lead to zero profits because the theory of interest rate parity.

There are several things that need to be monitored by speculators using this strategy. On the one hand, they should ensure that they buy the currency with the higher interest rate and sell this to the lower. On the other hand, they need to analyze economies offering both currencies to ensure that the market will move against their positions. That is, speculators looking to buy the currency of a country with a strong economy, and to sell the currency of that which is in difficulties or is expected to happen.

Normally, a country that offers higher interest rates to attract more capital as investors prefer higher returns. With increasing interest in a country, will create a positive flow of capital, which will lead to appreciation of the value of the local currency. So the main purpose of speculator relying on "carry trade" is to successfully predict changes in interest rates.