The Yen Carry Trade

[schundler]

The BoJ decided to leave interest rates at 0.5% a few days ago for the time being.

If one were to borrow japanese yen, then convert it into dollars (or another currency) and invest it at 5%, profit can be made. The only risk is in changes in the exchange rate between the currencies.

A few questions.

I've read conflicting reports on the future of the Yen Carry trade. Some say it will continue, others that it won't. Which is right?

Some hedge funds do this. As a private investor, and a US citizen, how would one go about getting a Japanese loan logistically? Is this even possible?

[ahnuld]

it is possible, but really it is gambling imo unless you know something others dont. Most of the profits you are talking about are arbitrage profits and those are pretty non-existant these days, even though people still attempt it. I mean, if you did your sceme and locked in a currency value using a forward contract there wouldnt be any profit to be had. Of course you could do what you are speaking of but the forex exposure is pretty significant and can be many times youre return if things move against you.

[DcifrThs]

[ QUOTE ]
it is possible, but really it is gambling imo unless you know something others dont. Most of the profits you are talking about are arbitrage profits and those are pretty non-existant these days, even though people still attempt it. I mean, if you did your sceme and locked in a currency value using a forward contract there wouldnt be any profit to be had. Of course you could do what you are speaking of but the forex exposure is pretty significant and can be many times youre return if things move against you.

[/ QUOTE ]

this is a good concise explanation. the main point i'll stress again is that interest rate differences are taken into account in the forward market.

another thing to keep in mind is the payout profile of this type of bet. typically, you'll make a small amount while the currency remains weak and not volatile when it finally breaks, the currency tends to do so in a big snap. w'ere not just talking about "many times your return [of the yen carry trade]" here.

in terms of the size of it currently, do you have any #s on that?. i've seen estimates and know it is hard to come up with even those, but i'd like to see maybe if you know or have seen something i haven't.

thanks,
Barron

[schundler]

"Official Japanese statistics suggest that for much of 2006, Japan actually had a net inflow of bond investment -- which would imply that the carry trade was a collective figment of the world's financial imagination. More helpfully, a leading Japanese official last week estimated conservatively that the carry trade was worth between $80 billion and $160 billion."

"A better estimate of the size of the carry trade is the record of net "short" positions in yen futures on the Chicago Mercantile Exchange. This puts the total size of the carry trade as high as $1 trillion."

http://www.theglobalguru.com/article...;offer=GURU001

[DcifrThs]

[ QUOTE ]

"A better estimate of the size of the carry trade is the record of net "short" positions in yen futures on the Chicago Mercantile Exchange. This puts the total size of the carry trade as high as $1 trillion."


[/ QUOTE ]

two things i don't quite understand about this...first off, the futures market isn't where the bulk of future currency transactions take place. the futures mkt is like 1% or so of the forward market.

secondly, in neither futures nor forwards does money actually change hands. in the former, a margin is put up to track day to day changes in the underlying asset (in this case the yen vs. other higher yielding currencies). in a forward, no margin is put up.

in order to engage in the carry trade, you have to borrow in yen and invest in AUD or USD or another higher yielding currency (the auther also failed to mention how the aussie dollar should be the largest recipient of carry trade funds). but you dont "borrow in yen" by shorting yen forwards...

this doesn't add up to me.

Barron

[NajdorfDefense]

Nobody knows, it's not worth doing as your FX hedge will more than eat up the interest differential, if you want naked FX risk I will suggest you are not really cognizant of the risks. You're trying to make 4% extra a year for a currency that easily can move 20-30% in that time frame. That's horrible risk v reward.

[JacKnight21]

Carry trade = 4 bet bluff = sure 12-18 months ago you were printing money now the pros aren't doing it that much. You need to be ahead of the curve not behind.

therefore 5 bet bluff or put your money in distressed debt thats where the action is now