Buying a low interest loan in japan, and then converting to dollars is the same thing as reciving a low interest floating rate loan. Lets say you have to give the bank 1 yen per month, and every 1 yen=1 dollar. So you have to pay 1 dollar a month to the bank. If the yen increases in value so that 1 yen=2 dollars, then its the same as saying your intrest rate doubled.
I am not entirely sure I am answering the intent behind the first question, or where the thread has evolved to, but the carry trade is extremely easy to initiate. <b>in nitty-gritty details </b> - long any of the following currencies USD (5.25% yield), EUR (3.25), AUD(6), NZD(7.25), CAD(4.25) -and short either JPY (0.25) or CHF (1-1.75%) By shorting the low yielding currencies to long the higher you earn on the carry, or the interest rate differential. * clearly though this can get complicated, what if the Franc or the Yen rallies against the pair you long? Then youâd the capital lose could overcome your rollover interest earnings. <b>Which currency pair specifically to long or short?</b> That thus depends on interest expectations and anything else that can move markets. For a good recent report on where interest rates might head see that long link below. http://www.dailyfx.com/story/strate...Fed___Surprisingly_Hawkish_1160476285617.html But beware the yen on the carry trade â theyâve had interest rates at 0-0.25% for at least 4 years now. Imagine if you where in Japan, what would you do? Probably move your money to New Zealand/Australia (Uridashi & Eurokiwi) bonds. But all that Japanese money that has left Japan over the years (and thereâs lots) can come streaming back at any moment. And lastly where specifically you may initiate this kind of speculation, i think there are probably twenty brokers listed on elitietrader's homepage www.elitetrader.com. Popular ones are fxcm, oanda, and MB (I've been testing demos on all for a while - no comment really on which one to go with) Tom F
Tom F, nice explanation for Fx carry trade. A simple carry mechanism using futures, would be to "short" the front month Yen futures contract The price of the contract decays over time at a rate equivalent to the differential between JPY overnight and USD libor overnight. In other words, you extract a very efficient interest rate delta (the most efficient I can think of for an individual). Of course, the currency fluctuations may outweigh the interest decay ... and you have to "roll" the contracts every 3 months. I am leaving out several details, but roughly, I believe this is the best way for larger sums of money (mutiple $100ks).
there's an extensive literature on these carry trades. Google "forward-premium puzzle" or see e.g. http://www.nber.org/papers/w12489
In Tom's example has there even been any "borrowing" in the sense that a creditor - debtor relationship was created and loan proceeds were made available to invest in markets?
From Bloomberg: BOJ Hasn't Started Survey Targeting Carry Trades, Official Says By Masahiro Hidaka and Mayumi Otsuma Oct. 18 (Bloomberg) -- The Bank of Japan denied a Nihon Keizai newspaper report that it has started a survey of transactions where hedge funds borrow funds cheaply in Japan to invest in higher-yielding assets overseas. ``It is not true that we've recently started a survey specifically on the carry trade,'' said Tokiko Shimizu, the head of the bank's foreign exchange operation division. ``The BOJ is monitoring movements of financial markets daily and we are interested in the carry trade too.'' The newspaper said the central bank plans to increase scrutiny of such transactions, known as carry trades, without saying where it obtained information. The increase in monitoring stems from concern that carry trades have contributed to the yen's recent weakness and may impact short-term interest rates, the newspaper said. --RS
Hello, How do I borrow in yen. I'm a forex trader and I live in Nairobi,Kenya. I want to borrow in yen and invest in REPO'S on Kenyan Government Securities. The minimum needed is about $725,000 and the repo rate is 6% with a maturity of 7 days and 6.15% with a maturity of 14days. I don't have the money to do this so how can I do it? You can email me personally from my profile if you wish to. Thanks.
John Kerrigan submits: How much Yen Carry Trade is considered "excessive"? As of March. the numbers of the Yen Carry Trade are equivalent to US $800 Billion, according to a Wall Street bank. (Estimates do range from 300-1000 Billion, all huge numbers). The question is then how much is too much? Consider this: Japanese don't trade the yen to invest in Australian$ or Brazilian bond, or Chinese stocks. They need yen to buy food, housing, cars, and the good things in life. Their business quarterly repatriates hundreds of billion dollars back into yen. So business and public demand of yen is, mildly speaking, far from zero. A real crisis can happen when speculative yen demand interferes with the real economy demand of yen. Take the M2 supply: deposit, cash, and quasi money - that number is 700 Trillion Yen, or 6 Trillion US$, or 6000 billion US$. A rule of thumb would suggest that a crisis could be in the making if the business/public suddenly compete with speculators to get Yen. Currently we are at about 10-15% Yen money supply in terms of the amount being speculated. Common sense suggests to me that there is beginning to be a competition of demand for yen not just among speculators, but businesses as well. I would say if we ever reached 100% of the money being loaned for speculation, there will be serious consequences in terms of regional monetary stabilities. It's up to the Japanese government to determine whether there should be a stampede today or a monumental stampede later. A colleague joked that it would be funny if as the Japanese man stood in front of an ATM he got Google stocks or Brazilian bonds instead of yen notes.