CARRY
TRADE
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What is?
A currency carry trade is a strategy
in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a
different currency yielding a higher interest rate. A trader using this strategy attempts to capture
the difference between the rates, which can often be substantial, depending on
the amount of leverage used.
Example:
- Now it is Japan's lowest interest
rate 0.5%
- The highest interest rate is New Zealand 8:25%
- We borrow money from Japan then saved to New Zealand
- We can get 8:25% but pay 0.5%, it is 7.95%
- The highest interest rate is New Zealand 8:25%
- We borrow money from Japan then saved to New Zealand
- We can get 8:25% but pay 0.5%, it is 7.95%
- Well above transaction is called
CARRY TRADE
In this small scale this is the calculation
of swap / overnight, so the profit you earn from the difference in interest
rates.
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Forex market is a market that can not be predicted accurately, yes we can
predicted it base on technical analysist or fundamental analysist, but however,
we still can not understand the direction of currency movements, therefore came this carry trader it is one that is quite popular system used to
generate profits by investors and financial managers in the biggest financial
firms in the world. Without the carry trade, forex trading is a hotbed of
speculators. those who only focus on carry trade can be regarded as true that
forex investors. Because how great the speculators (eg George Soros), one day
he would return to the carry trade. Its basic as carry trade is impossible to
resist forever.
Those of us, small players, at least have to pay attention to this in order
not to be brought current. If you play in the long term, ex, one week a
transaction, should follow the flow of the carry trade. Do not follow the flow
of speculators.
Advantages
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One advantage of the carry trade in the spot forex market is the payment of
interest occur every day based on your position. Even if you keep your position
open longer than one day, which is actually the case broker closes your
position and then open it again the next day, and then they gave debit or
credit payment of the interest rate differentials between the currency pair you
are trading. It is also known by the term "roll over".
Leverage factor applied by the forex broker makes the carry trade is very
popular in the spot forex market. Almost all forex trading on margin, meaning
you only need a small amount of money to be able to open a position. In fact
there are only membutuhkun only 1% - 2% margin to open a position.
So whether profitable if Carry Trader maintains his
position for 1 year?
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As an example:
George Soros has a cash of $ 10,000 and decided to use the money as capital for forex trading. He opened an account with a forex broker, then find the currency pair has a different interest rate of + 5% per year.
Broker choice requires only 1% deposit to open a position (100: 1 leverage), so as to position 1 lot ($ 100,000) needed only $ 1,000 as margin. George Soros now control the currency position amounted to $ 100,000 and receive a 5% interest per year.
George Soros has a cash of $ 10,000 and decided to use the money as capital for forex trading. He opened an account with a forex broker, then find the currency pair has a different interest rate of + 5% per year.
Broker choice requires only 1% deposit to open a position (100: 1 leverage), so as to position 1 lot ($ 100,000) needed only $ 1,000 as margin. George Soros now control the currency position amounted to $ 100,000 and receive a 5% interest per year.
What happens to the
George Soros account if he maintains his position for 1 year?
There are three possibilities occur:
There are three possibilities occur:
1. Value of currency positions suffered losses.
Currency bought moves down so George Soros suffered losses. When the losses that occurred reaching the margin, then the George Soros open positions will be closed so that on his account only the remaining $ 1,000, the amount set aside for margin.
Currency bought moves down so George Soros suffered losses. When the losses that occurred reaching the margin, then the George Soros open positions will be closed so that on his account only the remaining $ 1,000, the amount set aside for margin.
2. Currency pairs remain on the same exchange rate at the
end of the year.
In this case George Soros does not make a profit from changes in currency prices, but profit from the difference in interest rate of 5% per year. For transactions of $ 100,000 he received $ 5,000 from interest payments. Of the $ 10,000 that he used as capital (margin), he had to get 50% profit.
In this case George Soros does not make a profit from changes in currency prices, but profit from the difference in interest rate of 5% per year. For transactions of $ 100,000 he received $ 5,000 from interest payments. Of the $ 10,000 that he used as capital (margin), he had to get 50% profit.
3. Value of currency positions increased.
The currency pair is bought to increase the price, so it's not just George Soros profit from interest rate payments, but also of the increase in the exchange rate of the currency bought.
The currency pair is bought to increase the price, so it's not just George Soros profit from interest rate payments, but also of the increase in the exchange rate of the currency bought.
With the leverage
factor of 100: 1, George Soros has the potential to generate profit by 50% per
year based on an initial capital of $ 10,000, well above the profit obtained when
he was just depositing the money in the bank.
Disadvantages
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Carry trades work when there is a change in the financial conditions that
will occur gradually, allowing investors or speculators enough time to close
the trade and lock in profits. But if the environment changes unexpectedly,
investors and speculators also could be forced to close their carry trades
investment as quickly as possible. Unfortunately, this kind of reversal was
calculated as investments carry trades which have unpredictable consequences
that have the potential to destroy the global economy.
Note this
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1. Changes in average daily range high
As previously described volatility is a major factor that
must be considered the carry trader. In case of extreme sentiment on financial
markets, the volatility will increase. This can be observed in the average
daily price movement range (average daily range). When changes in average daily
range the greater the volatility is also higher. This can be monitored by the technical
indicator Average True Range (ATR), which usually are used to determine the
magnitude of change range at a given time period.
2. Bank cuts interest rate
If the state of the global economy is at high risk and
have a negative impact on the market, some of the central bank will conduct a
policy of cutting interest rates. This will cause the carry trader review the
trading position is typically direncankan in the long run. Volatility due to
interest rate cuts typically occur while the (short term), but because the cut
is usually the target currency carry trade (eg interest rate cut the Australian
dollar, if traders buy AUD / JPY), then in the long term profit from the
difference in interest rates obviously will be reduced.
3. Government Intervention
Although small frequency, the government can intervene in
the forex market if the exchange rate is considered too strong or too weak in
accordance with the expected reference to the central bank. With the
intervention of the value of the currency will strengthen or weaken rapidly
which of course affects the exchange rate volatility and carry trade currency
pairs. As is known, the central bank of Japan (BoJ) often intervene in its
currency.
4. Ideal conditions for the carry trade
Extreme market sentiment is not always the case, as well as high volatility. Forex market, and also the stock market will usually recover (recover) along with the increasing returns that result. Investors usually wait state is most suitable or close to ideal for the carry trade, ie if the global economy is growing rapidly with the level of interest rates in some countries are already quite competitive.
Extreme market sentiment is not always the case, as well as high volatility. Forex market, and also the stock market will usually recover (recover) along with the increasing returns that result. Investors usually wait state is most suitable or close to ideal for the carry trade, ie if the global economy is growing rapidly with the level of interest rates in some countries are already quite competitive.
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The carry trade is great for the big trading outfits,
but it doesn’t help the average person. And that is why there is such great
income disparity.
