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Jun 8
Some More Foreign Exchange - Carry Trades
Another popular FX trade is one called the "Carry Trade".  This trade takes advantage of interest rate differentials in different countries.  A very popular carry trade over the last few years that is ending now is the Japanese Yen (JPY) US dollar (USD). 

There are two requirements for a carry trade to work well.  There has to be a significant interest rate differential between the two countries.  And the higher interest rate currency should be trending stronger against the lower interest rate country.

Here is how the JPY/USD carry trade might work.  You would borrow Yen at very low interest rate.  You would use the JPY to buy USD.  You would invest the USD at a much higher interest rate.  You would earn enough interest in USD to trade back into JPY when interest payments were due and would still have USD interest left over because of the difference in rates.  In the meantime, the USD is appreciating against the JPY so you have capital gains as well.  When you think the game is over, you sell enough USD to repay your JPY loan and realize your capital gains.

The interest rate differentials are easy to find.  The hard part is being right about which currency is going to appreciate against the other.

Good luck, now go out there and make some money.

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