What you need to learn about carry trade, which means evaluating foreign currency borrowings and deposits at a low interest rate in another currency with a high interest rate.
Carry trade is a common and simple strategy of choice in international foreign exchange markets, although it is identified with the jargon of ev Japanese housewives eden, which represents small investors who cannot meet high returns in the Japanese financial markets.
What is carry trade and how? Here is everything you need to know about carry trade, which is widely used in the foreign exchange markets and is one of the relatively simplest strategies.
What is Carry Trade?
Carry trade is a strategy used to evaluate the foreign currency borrowed and earned deposits in a low interest rate in another currency with a high interest rate and thus to achieve higher returns.
Investors applying the Carry trade strategy aim to benefit from variable interest rates as well as profit from exchange rate changes. Thus, such an investment, borrowed from a low interest rate and made from a high interest rate, provides a high return on interest.
Carry Trade How?
Carry trade is carried out by borrowing in a currency with a low interest rate and evaluating the deposits obtained in a currency with a high interest rate.
Generally, this method is applied by individual investors who do not get enough returns in their countries.
For example, investors in Japan are turning to the currencies of developing countries because they cannot get enough returns from their savings in the Japanese Yen. Japanese traders using the Carry trade method invest in currencies such as Mexican Pesos, Turkish Lira, Brazilian Real, Polish Zilotisi or South African Rand where they can get higher interest rates.
What should be considered while Carry Trade?
There is a currency risk that the investor who applies the Carry trade strategy has taken on during his / her position. For example, an investor who borrows from the Japanese Yen and evaluates his savings in US Dollars will risk almost any activity in the dollar / Japanese Yen parity. The currency pair chosen for the carry trade is extremely important, as decreases in the pair will put the investor in a loss.
The losses that may arise from the volatility of the parities with high volatility may in some cases exceed the interest rate and cause damage to the investor. Therefore, it is important to try to select currency pairs with low volatility for carry trade.
Finally, possible interest rate changes in currency pairs may also overturn existing balances suitable for carry trade. For this reason, investors who want to use carry trade strategy should closely follow the interest rate policies of the central banks of the country.