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Chapter 26, Part II. Should We Rely on Carry Solely? Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: The point is that forex speculators (both long-term as short term) want just make money on rate difference, and if they will be able to surplus some carry – all the better. But there are a lot of other participants, big financial institutions, hedge and mutual funds who use carry in a bit different way. Their forex position is just a sub product of total investing. Their major aim is to earn a return on their investments that they did in bonds, shares, commodities, futures etc. So, they use forex just to convert a weak currency into strong currency. Then they invest the strong currency in some assets that let them earn a greater return than just the central bank rate.

    For instance, some hedge fund borrows JPY, sell them for AUD and invests the AUD in Australian government and corporate bonds and shares. In this case, this fund pays a bit larger than 0.1% rate on JPY loan, but it earns much greater than just 4.5% (AUD rate).

    Pipruit: But what if the AUD/JPY will start to rise? This fund will have to pay out more JPY, so its real rate will increase significantly…​

    Commander in Pips: You’re looking right it the root of the issue, but why should the AUD/JPY should start to rise? What are the reasons? You should understand that now we speak about changing of fundamental trend – short-term splashes and other noise do not interest us.

    Pipruit: Well, I don’t know, what if crisis starts, as in 2008, or the Australian economy will fall in recession?​

    Commander in Pips: That’s it! You answered your own question, when it makes sense to deal with carry by yourself.

    Pipruit: I did?​
    #1 Sive Morten, Dec 26, 2013
    Lasted edited by : Oct 3, 2016
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