So how does this yen/us$ carry trade really work? I go to a bank, open a yen and a dollar account. Borrow for example 11,861,500 yen at 1,5%, transfer that money into US$ 100,000 for this example. Buy T-bonds at 4.65%. Hedge the Yen exposure and pocket the difference. Where´s the catch? What´s the margin needed? Which banks allow this construction?
You don't hedge otherwise you give up the difference. That is, the hedge has the interest rate difference priced in so if you borrow JPY, convert to USD and hedge the FX exposure then you would earn the same return as if you simply invest in JPY.
All that work for 3% APR?! Try going long USD/JPY at an online forex dealer instead. Or another ---/JPY pair like NZD or AUD. Preferably with leverage. The more the better. Japanese housewives do it all the time, you know. Can't go wrong.
Of course you can hedge by selling USD/buying JPY forward, but the forward rate includes the difference in interest rates, it's called interest rate parity.
You don't hedge. Also a very important thing this is which currency is the money/asset that you are using as COLLATERAL to borrow. It aint just about selling yen and buying dollars like so many articles like to say
How about $100k in T-Bonds, to use as a collateral to borrow 11,861,500 yen at 1,5%. Use the yen to buy T-bonds. Use these T bonds as collateral to borrow more yen, hedge every 12mil yen with 1 JY long. Repeat ad infinitum. PS I just called citibank and they won´t lend me any Yen
I just short JPY futures and go long YM. Works like a charm!!! Ok nice I've been looking for the holy grail, thanks bud!!!