Carry trading, please explain.
What is Carry Trade :
All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Money shifts from around the world in seek of the highest yield and the benefit of trading currencies is that you are dealing with countries that have interest rates, which are charged or received every single day. If you are positioned on the side of positive carry, you have the right to earn that interest, which can be quite lucrative over time.
completly see:
Two Currency-Speculation Strategies
The first strategy,
known to practitioners as the ‘carry trade’, involves borrowing low-interest-rate currencies
and lending high-interest-rate currencies, without hedging the exchange rate risk.
The second strategy, suggested by Bilson (1981), Fama (1984), and Backus, Gregory, and Telmer (1993),
relies on a particular regression to predict the payoff to selling currency forward.
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Hi all, I have read so much about traders doing carry trading. I have read an article on carry trading saying if you buy $1,000,000 USD/JPY (US interest rates: 5.25%, Japan interest rates: 0.5%), when you only pay $10,000 because of the 1:100 leverage. After a year, you will collect the difference in interest on US and Japan of 4.75% of the 1,000,000 !!! Which works out to be a quite substantial amount!
Is that true? Or the interest you will be paid only based on the amount you actually paid, which is 10,000,........not 1,000,000.
Can anyone comment on this?