Currency Carry : How do Banks do it??

Discussion in 'Forex' started by Remiraz, Jul 30, 2005.

  1. Remiraz


    I read about institution Carry trades all the time. Buy a currency with higher interest, sell one with lower interest. Eg. Long GBP/USD.

    How do they hedge their position?? The position might drop couple hundred pips, making the profit from interest useless. Since interest is already reflected in the futures/ else can they hedge? :confused:

    Arbitrage i understand....its risk free. Quant funds i understand...taking on some risk to trade a statistically valid strategy (some dun work out though, like LTCM). Carry is a mystery to me, and almost no info out there on the net. :(
  2. futures? derivatives? otc options?
  3. How do you think they might hedge their positions?
  4. Lucrum


  5. Remiraz


    he doesn't seem to be very good other than using a lot of messy terms. :p
  6. If you buy GBP/USD & sell EUR/USD you have yourself a hedged portfolio.
  7. Would you not be at risk to movements in Eur/GBP as what you have done is created a long position in sterling and a short position in the Euro.
  8. Remiraz


    lol i used to think the same for EUR/USD & USD/CHF too. Currencies are rather unique in that hedging with correlated pairs don't do squat. :(

    Long EUR/USD and Long USD/CHF = Long EUR/CHF. -_-'''
  9. Ok then throw in AUD/JPY to the mix. The more uncorrelated pairs you have the better hedged is your portfolio. Diversification is a good hedging tool. I would like to see some kind of index equivalent to S&P 500 in forex.
  10. MR.NBBO


    There is, the G-8 currency index.
    #10     Jul 31, 2005