The carry trade begins with the conversion of the low-interest currency into the high-interest currency, begins with the deposit of the high-interest currency into the country’s banks and financial institutions as a process and means, and ends with the conversion of the high-interest currency back into the low-interest currency.
Above, in addition to earning interest income on the difference, the carry trade also provides income from fluctuations in the two currencies.
1. High-interest Currency and low-interest currency As we all know, the current eight mainstream currencies, belonging to, New York Dollar, and the currency with higher interest rate in the interest rate cycle in recent years, are classified as low-interest currency, while, and are in the state of zero or even negative interest rate, and are also the preferred currencies for sale in the operation of carry trade.
In addition to the major currency pairs, many emerging market currencies have high interest rates, e.g.
However, despite their considerable interest, they are also subject to very large volatility.
If you lose a lot of money to earn interest, it’s not worth it, and we need to be very careful about that.
2. Carry operation Carry trade has two manifestations: one is to directly convert their low interest rates into high interest rate currencies and deposit them in national bank institutions;
Second, borrow from a country with a low interest rate currency, convert the borrowed low interest rate currency into a high interest rate currency, and deposit it with the country’s banking institutions.
At present, carry trade has been extended from real currency to forward non-deliverable.
Large amounts of low-interest electronic foreign currency are obtained using small principal amounts in the form of leverage margin, which is then converted into high interest rates that can be settled at any time, with interest paid once a day.
As mentioned above, if you want to play the carry trade, the key is to “borrow low and buy high”, that is, to go short in low-yielding currencies and long in high-yielding currencies.
Operationally, we can choose a larger time level to make the holding period longer.
Imagine a carry trade at 100 points.
Since you can risk $100, you open 0.1 hand.
We assume that the trade may or may not be stopped, but as long as the position is held for a long time, we can charge interest on the inventory every day.
Even if it is stopped, the loss is less than $100, and if it makes a profit, it can expand the profit.
So the carry trade can make holding a position less stressful.
It is important to note that there is no need to consider the carry operation in intra-day short trading.
We should make it clear that the carry trade is a passive income.
Mastering the carry trade will only increase the opportunities for trading profits, which cannot be compared with the profits generated by trading.
3. How to Reduce the Risk of carry Trade Carry trade is now mainly carried out by large institutions with large trading funds, so there will be “covering arbitrage” and “non-covering arbitrage”.
The latter is the carry trade in the state of nature, which is more risky.
The former is a high-yielding currency that gives traders a “forward pool” based on the development of the currency. “If this forward trade can guarantee profitability, then large institutions will carry out this trade, which is one of the ways to avoid risk.
Currency carry has been one of the survival trading strategies that, along with trend trading, has supported many of the largest global hedge funds.
In addition, for a pure pair of foreign currency carry trade, the main risk is exchange rate volatility.
The common practice is to bet on currency trends in a trend strategy.
The problem is that the exchange rate is much more volatile than the interest rate spread, so in the long run the single currency pair’s carry rate is prone to burst.
So we can spread the risk.
Many academic articles have looked at this, using the 10 currencies with the lowest interest rates to finance, then buying a basket of currencies with a higher interest rate (20) and sitting on the interest.
That way, even if there is an accident in one country, the impact on the overall portfolio is relatively small.
Canadian dollar falls on hold;
The new rules sent the pound to its lowest level in nearly a year.
Please pay attention to the specific operation, the market is changing rapidly, investment needs to be cautious, the operation strategy is for reference only.
