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| Hello, I heard a lot about carry trade. Actually, can any retail investor participate in carry trade? I know DBV sort of track interest rate gap. But I am more interested in the real carry trade, i.e. borrow from low rate currency with some sizeable volume, and park the money into some high rate currency in some form of CD. Also, how do funds borrow from Yen? I am sure they somehow have access to rate that is very close to, if not equal to, the Japan FED rate (i.e. 0.5%). Any suggestions will be appreciated. Thanks. H
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hortonlkh (6/7/2007)
Hello,
I heard a lot about carry trade. Actually, can any retail investor participate in carry trade? I know DBV sort of track interest rate gap. But I am more interested in the real carry trade, i.e. borrow from low rate currency with some sizeable volume, and park the money into some high rate currencyin some form of CD.
Also, how do funds borrow from Yen? I am sure they somehow have access to rate that is very close to, if notequal to,the Japan FED rate (i.e. 0.5%).
Any suggestions will be appreciated. Thanks.
H
Yes a retail investor can investing the carry trade. But be forewarned that the currency market is not regulated and as a result more brokerages act like bucket shops of old. I would recommend www.oanda.com as one of the best currency brokerages but I recommend you do your diligence. You must deposit funds that act as your margin or collateral. You can then leverage your funds by 10 times, 20 time, 50 times and in some brokerages up to 400 times your initial margin.
With the account balance at 50 times your margin you can then purchase a currency pair. In order to trade a currency you always sell one to buy the other, so in the case of USDJPY, going long the pair would have you selling Yen to buy dollars. Because you are borrowing Yen you have to pay interest to do so but at such a low rate it is negligible if you compare it to the high rate you are getting from buying dollars. On a $100,000 lot you can be earning approximate $10 per 24 hour period. If you are margined at 100:1 then you would only need $1,000 in order to get this interest.
The risk involved is high as having to leverage yourself at such a high level would mean they you are increasing volatility. A currency can move by a factor of one or two basis points in a few days, and could effectively wipe out your position in a matter of minutes if the trade goes against you. Precautions have to be taken and great money management techniques should be used to minimize risk.
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This was something I was interested in as well. Thanks for your detailed post andrzejlipski.
--If the doors of perception were cleansed everything would appear to man as it is, infinite. — William Blake.
Yes, I am blogging @ http://www.sinletter.com/ablog.aspx
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To add I would recommend that anyone new to currency trading review this website. Its for beginners just starting out and goes through some of the basics if at an elementary level. It is all essential to trading the forex market. I recommend it to everyone to is interested in it.
Currency trading is an excellent instrument if you use it carefully. I usually trade at 50:1 leverage, which is quite high, but I manage small positions risking only 1% of the total account balance with each trade when I am speculating. I will also use it as a hedge against a foreign position. If I but an ETF such as EWJ which tracks the Nikkei and I expect that something may put pressure on the dollar or strengthen they Yen I will trade USDJPY to hedge my position without having to sell it. I was able to minimize my downside risk by hedging some of my profits in a a secondary position that sits in cash in case of such events.
In these global markets it behooves an investors to seek all available resource to protect their portfolio against even currency fluctuations. In an economy with a depreciated dollar I found forex to be very usefully to keep myself competitive with the world.
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| Thanks andrzejlipski. It's certainly enlightening! H
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