Part II. Crosses – Continuation of Discussion... Commander in Pips: Let’s continue with cross pairs and focus today on interest rate differential between different countries. Pipruit: Is this called “Carry trade” as you’ve once said? Commander in Pips: Right. The foundation of this issue is very simple. If you sell some currency with low interest rates and buy some with higher one, you will be able to get additional appreciation of your assets not only by price movement, but also as a rate difference. Pipruit: Do you mean that even if the exchange rate will stay stable, my assets will rise? Commander in Pips: That’s right. As a rule this profit will appear as “swap” in your trading terminal. You may re-read some lessons where we’ve discussed the calculation process (Fundamental analysis chapter 21, Lesson 1 and Chapter 5 Lesson 2, Intermediate Checkpoint) and described what swap is. Pipruit: Can you give me an example of such a pair? Commander in Pips: Sure. The most common pair that is traded in such a way is the AUD/JPY pair: See – here are solid long-term trends, market spends in consolidation very small time. So, imagine that you have long position in AUD/JPY during some trend up. For instance, currently Australian rate is 4.75%, while Japan holds at 0.1%. So, even now it’s big. But that was a time, when it was even bigger – around 6.75% on AUD and almost 0.0% on JPY. Pipruit: Interestingly, when it was? Commander in Pips: Approximately in 2002-2007. Pipruit: Ok, and what kind of appreciation of my assets I could get? Commander in Pips: Let’s see. I give just approximate calculation and we assume that rates will stay stable all the time. Let’s take current AUD/JPY rate at 81.23. So, just 1 year holding this long position and you will get: 81.23*(1+0.0475)/(1+0.001) = 85.00 Pipruit: Wow! Not bad appreciation… Commander in Pips: Yep, and now imagine that you hold position 3-5 years, you have at least 1:20 leverage… Pipruit: Sir, it looks really significant. Thanks… Commander in Pips: Well, with pure approach we should calculate it based on real rates (excluding inflation), but even with this approach as it is, we have impressive numbers. A bit later we will return to discussion of this material with more scrutiny.