Carry Trade in Forex | carry forex trade
You’ve heard of it, its a tatic used by the hedge funds to generate loads in income from a relatively small investment. The carry trade is considered to be far safer than speculative currency trading and it has the ability to create huge returns. We tried to discuss a bit about it at what is the yen carry trade?
The carry trade, and the carry trade basket (plural) is something that is never truly perfected due to rapidly changing prices but neither is it completely unprofitable.
The carry trade results from a difference in the bid and ask interest rates offered at banks around the world. The carry trade is similiar to borrowing $10,000 from an introductory credit card at a low interest rate, say 2% per year, and depositing the money in a bank account or certificate of deposit to generate 4% a year. A net gain of 2% a year, or $200.
In forex, these trades are everywhere. The only problem though, is generating a return from carry trades always requires borrowing from one currency and depositing in another. The movement in one currency pair can send your carry trade down in value, pushing up your daily interest but completely destroying your equity in the trade.
For example If I were to buy USDJPY, I would be borrowing Japanese Yen to invest in an American bank account. I can borrow $100,000 worth of JPY for just .8% per year, a very cheap interest rate. The $100,000 is then put in an American account with a 4.65% return.
My investment of $2,000 to secure $100,000 in currency would then yield 3.85% per year, or $3,850 per year if the exchange rates stay the same.
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