Yet this worthy strategy is often overlooked in favor of ones that might deliver quick profits. Interest rates are one of the biggest drivers behind currency movements. And one of the main reasons for this alpari forex calculator oanda the carry trade. Put simply, carry trading is a strategy for profiting from the difference in interest rates between two currencies.
Works To properly understand the carry trade, we first need to look at what’s actually going on when a trade is executed in the spot forex market. The spot market simply means for immediate delivery as opposed to delivery on a future date. When you enter into a trade, you in effect buy one currency and sell another for a given contract size, at the current exchange rate. However, as most forex trading is speculative and done with borrowed money, it’s more appropriate to think of one currency being borrowed, and the other lent. Just like when you go to a high street bank, when you borrow or lend money, interest payments are due. The basic aim of the carry trade is to borrow a currency with a low interest, and lend a currency with a higher interest. This results in a positive interest rate flow.
Carry trading has the potential to generate cash flow over the long term. This ebook explains step by step how to create your own carry trading strategy. It explains the basics to advanced concepts such as hedging and arbitrage. This strategy can be very rewarding because interest is paid on the full amount of the contract. Since most forex traders use leverage, the carry trade can offer a substantial income yield.
Let’s assume for this example that the base interest rate of the Australian Dollar is 2. While the base rate of Japanese Yen is 0. This means there’s a gross interest rate difference of 2. JPY, what we are doing in effect is borrowing Yen, and lending Australian dollars. 9,250,000 at an interest rate of 0. 100,000 at a rate of 2.
1 is the rate before the swap spread is applied. Below I explain how this is calculated. Notice that after applying the spread, the net interest paid on the short side is much higher than that gained on the long side. 04 from the lent Australian Dollars. 08 from the borrowed Japanese Yen. We must pay interest on the AUD, and we receive interest on the JPY deposit.