Does anyone here use an offsetting futures position to hedge carry trade risk? Ex. long 100,000 in usd.jpy for the interest rate difference and then sell 1 usd.jpy futures contract for the current quarter?
The cost of carry is already priced into the futures contract (which is for 125,000 usd.jpy by the way). Thus the value of the future decreases as expiration approaches as the cost of carry (for the smaller period) decreases. Which means you don't get a free ride from the interest on your cash long - instead you lose money from the difference between the long and short interest rates.