Okay forget the carry trade in the short JPY and long EUR sense. Now if Japanese banks are offering loans at 1% then what's to stop everyone and his mother from taking out 1% loans to pay for mortgages, car loans, etc. Hell, developing countries could take out loans at 1% to fund infrastructure projects. Why isn't this happening? I'm guessing Japanese banks won't give you a loan unless your a Japanese citizen? And I'm guess its illegal for a Japanese citizen to take the funds at 1% and loan them out at higher interest. Please move this thread to the Economics forum, I think its more suitable there.
Maybe because the exchange rate risk is, well, damn risky? If you had opened a carry trade with gbp vs yen at yesterday's close, you would need to hold the position for nearly (edit) 7 months for the interest carry to make up for the exchange rate loss for today's single session, assuming exchange rates remain the same (I just eyeballed the math, if I am way off hopefully someone can correct me - I think that's about right).
I've been reading about this 'carry trade' for some time in various publications, including the BBC article that I linked.
I don't trade Forex so I have limited experience with this stuff but lets say: GBP offers 5.25% interest YEN offers .25% interest Thats a 5% interest rate differential. So if a Japanese citizen were to borrow YEN from his local bank and invest it in a CD at a UK bank - then the YEN would have to appreciate 5% for him to lose money on this trade, is this right?
What is going on here? Is this really happening to elite trader? This thread has to be a joke. We should be discussing what type of options hedge would compliment a carry trade or the advantages of using CHF instead of JPY as a funding currency. Maybe it is time put on the old Goldman Sachs trade of short kiwi and long Brazilian Real?
It's not a joke. I'm not at all familiar with the intricacies of currency swaps and the carry trade, obviously.