Tuesday, November 10, 2009

US DOLLAR CARRY TRADE - A term you may hear more about in the future

So I've seen a lot of talk on zerohedge.com about the US dollar carry trade, and then I found this nifty editorial article discussing some of the dynamics of the Carry Trade.  The article is long but it puts some of the techniques that are used in the market that most people are not even aware of. 
I give you the Yen Carry Trade as described by the article:

The Yen Carry Trade worked like this in rough terms. The large financial firms borrowed Japanese money at the near 0% rate, a lot of money, and managed a Yen currency risk. They could either borrow cash from Japanese banks or integrate short Yen positions into contracts with equivalent risk exposure. They had liberty to invest in whatever instrument they wished, but the favorite in the last two decades had been the USTreasury long bond. They earned 4% to 5% vig on the difference, but required a rising USDollar and falling Japanese Yen.
There is a sentiment that the US dollar is now the Carry Trade Currency of choice. Thus this concept may be more common to hear about in the future at the layman level if things get ridiculous.

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