Carry Trade

Discussion in 'Forex' started by Spectre2007, Mar 24, 2007.

  1. 100,000 in equity

    100,000 invested with broker that pays interest

    14.25% paid/charged by iceland

    .50% paid/charged by japan

    14.25-.50= 13.75% net.

    sell yen buy krona

    you end up being long krona earning 13.75% better then what most funds can make.

    in 5 yrs your at 188K.
  2. tell that to the people who lost big in the "carry trade"

    a few weeks ago ~
  3. Iceland pays high price for bonds

    By Ivar Simensen
    Published: 19/4/2006 | Last Updated: 19/4/2006 19:00 London Time

    Iceland successfully auctioned government bonds for the first time in three months on Wednesday, but had to accept a higher yield than in previous sales, reflecting concerns about the country's overheating economy.

    The government debt agency sold IKr1.5bn (€15.4m) of four-year bonds at an average yield of 9.8 per cent. It accepted bids in its monthly auction for the first time since January 18, when the 2010 bonds were sold to yield 8.1 per cent.

    Wednesday's auction attracted demand worth IKr8.1bn from 20 investors. Beat Siegenthaler, strategist at TD Securities, said: "There is clearly strong interest in Icelandic assets at these yield levels."

    Nerves about the economy have pushed Iceland's borrowing costs sharply higher this year and the agency rejected prices offered by investors in the previous two auctions. "It's expensive funding for the debt management office, but I think they wanted to make the point that there's demand out there," said Mr Siegenthaler.

    Concerns about the economy could still be felt in the currency market, where the Icelandic krona fell to a fresh four-year low against the euro on Wednesday.

    The krona dropped 2.7 per cent to IKr96.97 against the euro and 3 per cent to IKr78.64 against the dollar. The krona has slumped 30 per cent against the single currency since the start of the year amid concerns about the overheating economy. The volatility has prompted debate about whether the country should adopt the euro.

    Iceland's strong growth in recent years attracted huge inflows. Investors were attracted to the high yield on Iceland's bonds and currency. But as rates have risen globally and concerns about Iceland have mounted, investors have started to sell Icelandic assets.

    Data released on Wednesday showed a further increase in wages in March, putting further upward pressure on inflation. Rates have more than doubled in two years to 11.5 per cent, and the central bank has warned it is prepared to raise them further.

    Mr Siegenthaler said the krona's fall had addressed economic imbalances, but warned that trading would continue to be volatile.

    "The main risk to Icelandic assets was the currency. It was overvalued, but now it isn't," he said. "Trading is still very momentum-driven, by active trading accounts. You don't want to buy a currency that's losing 2 per cent in a day. But when it calms down, a lot of people will find the yield levels very attractive."
  4. Here's a daily chart of JPY/ISK since Jan. 1, 1999 through yesterday, 8+ years:


    With the always useful benefit of perfect hindsight, we can observe that this particular carry trade would have worked out beautifully -- put on and left alone -- from the end of 2001 through 2005 (well, most of the time) and from the middle of 2006 on.

    On the other hand, the periods spanning 1999-2001 and the first half of 2006 (and other, less dramatic downtrends on this chart) would have each lost up to a few years of interest income, due to Yen appreciation again Krona. Without looking into this, I'd also expect that the ISK averaged considerably less than 14.25% APR throughout those years, thus reducing the income generated and increasing both the duration and magnitude of maximum heat / drawdowns of this strategy.

    Spectre, I think you'll agree that only the most sophisticated, well capitalized investors, ready, willing and able to dynamically manage their positions on an ongoing basis, will want to even consider allocating a portion of their overall portfolio to this type of strategy. It is clearly meant to be an active, as opposed to passive, strategy. Preferably within a partially / selectively hedged currency basket approach and/or combined with options.
  5. yeah you cant play in currencies unless your capitalized well, I have strats that are more passive then aggressive, they are more longterm oriented and carry trade based for a percentage of the returns.

    but overall, I've found that any passive system, drawdowns to some degree need to be entertained.

    If your constantly only going long a favorable carry trade currency at standard deviation oscillations at the outliers, and given the nature of currencies, you end up making a tidy sum.

    These opportunities involve setting alarms and looking at multiple pairs over months and waiting for a favorable moment.
  6. I have traded the NZD/JPY several times over the last few months and have made about $8k!

    Always going long, as until the Japanese raise interest rates to be any where near the Kiwi they will always be the weakest!!!

    I trade off of daily charts only and just wait for dips where I can buy and ride it up to the resistance levels. SO far it has worked every single time....

    Any other ideas from you carry traders?