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The New DU. Reply #12: I had to look this one up again: carry trades
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ozymandius
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Tue Jun-05-07 06:55 AM
Response to Reply #7 |
| 12. I had to look this one up again: carry trades |
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Currency Carry Trade
Here's an example of a "yen carry trade": let's say a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.
The big risk in a carry trade is the uncertainty of exchange rates...http://www.investopedia.com/terms/c/currencycarrytrade.asp
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