Foreign exchange – Can someone please explain what this below statement means?
Wednesday, February 10th, 2010 at
1:18 am
girish_05 asked:
”Carry traders, who sell the low interest rate Japanese yen for high-yielding currencies during times of high risk sentiment, continued to sell the Australian dollar this morning”. The Australian -Jan 22 2008.
”Carry traders, who sell the low interest rate Japanese yen for high-yielding currencies during times of high risk sentiment, continued to sell the Australian dollar this morning”. The Australian -Jan 22 2008.
What effect does interest rate have on currency trading?
Tagged with: High Risk • Japanese Yen • Sentiment
Filed under: Forex
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You can borrow Japanese yen at 0.5% interest
With that loan, you can buy New Zealand, or Australian dollars and make a big profit it that currency goes up in value
If it goes up 2% you make at least 1 1/2 % on someone elses money
If you use the loan to buy options on currency, you can leverage your gain many times over
So the borrowing of low interest money to buy appriciating other currency is the carry trade.
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 the investor chooses to use.
The big risk in a carry trade is the uncertainty of exchange rates