Carry trade - Revision history

Doug: Expand first definition.

2024-09-03T12:15:24Z

Expand first definition.

← Older revision		Revision as of 12:15, 3 September 2024
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	1. ''Foreign currency - trading - speculation - naked positions.''		1. ''Foreign currency - trading - speculation - naked positions.''

	In foreign currency trading, a naked carry trade - where the trader has no other related offsetting contract, asset or liability - is a speculative strategy.		In foreign currency trading, a naked carry trade - where the foreign currency trader has no other related offsetting contract, asset or liability - is a speculative strategy.

	Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.		Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.

Doug: Expand first definition.

2024-09-03T12:04:48Z

Expand first definition.

← Older revision		Revision as of 12:04, 3 September 2024
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	Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.		Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.

	For non-speculative corporate hedging contexts, see part 3 below.		For non-speculative corporate hedging contexts and applications, see part 3 below.

Doug: Differentiate hedging & speculative contexts.

2024-09-03T12:04:12Z

Differentiate hedging & speculative contexts.

← Older revision		Revision as of 12:04, 3 September 2024
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	1. ''Foreign currency - trading - speculation.''		1. ''Foreign currency - trading - speculation - naked positions.''

	In foreign currency trading, a carry trade is a speculative strategy.		In foreign currency trading, a naked carry trade - where the trader has no other related offsetting contract, asset or liability - is a speculative strategy.

	Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.		Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.

			For non-speculative corporate hedging contexts, see part 3 below.

Doug: Add link.

2024-08-29T17:22:23Z

Add link.

← Older revision		Revision as of 17:22, 29 August 2024
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	* [[Uncovered]]		* [[Uncovered]]
	* [[Uncovered arbitrage]]		* [[Uncovered arbitrage]]
			* [[Underlying]]

Doug: Layout.

2024-08-29T15:13:00Z

Layout.

← Older revision		Revision as of 15:13, 29 August 2024
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	:This strategic alignment ensures that carry trades are not merely speculative punts but integral components of a comprehensive risk management and financial strategy."		:This strategic alignment ensures that carry trades are not merely speculative punts but integral components of a comprehensive risk management and financial strategy."

	:''Understanding Carry Trades and How They Can Be Used: A Guide for CFOs and Treasurers - Lisa Dukes - Dukes & King -		:''Understanding Carry Trades and How They Can Be Used: A Guide for CFOs and Treasurers - Lisa Dukes - Dukes & King -Treasury Management - August 2024.''
	Treasury Management - August 2024.''


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	==Other resource==		==Other resource==
	*[https://treasury-management.com/blog/understanding-carry-trades-and-how-they-can-be-used-a-guide-for-cfos-and-treasurers/ Understanding Carry Trades and How They Can Be Used: A Guide for CFOs and Treasurers - Lisa Dukes - Dukes & King -		*[https://treasury-management.com/blog/understanding-carry-trades-and-how-they-can-be-used-a-guide-for-cfos-and-treasurers/ Understanding Carry Trades and How They Can Be Used: A Guide for CFOs and Treasurers - Lisa Dukes - Dukes & King - Treasury Management - August 2024]
	Treasury Management - August 2024]

	~~[[Category:Financial_products_and_markets]]~~
	~~[[Category:Identify_and_assess_risks]]~~
	~~[[Category:Manage_risks]]~~
	~~[[Category:The_business_context]~~]

	[[Category:Financial_products_and_markets]]		[[Category:Financial_products_and_markets]]

Doug: Add treasury risk management definition.

2024-08-29T15:12:05Z

Add treasury risk management definition.

← Older revision		Revision as of 15:12, 29 August 2024
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	1. ''~~Speculation~~ - ~~foreign currency~~.''		1. ''Foreign currency - trading - speculation.''

	A carry trade is a speculative ~~foreign exchange trading~~ strategy.		In foreign currency trading, a carry trade is a speculative strategy.

	It involves borrowing a low interest-rate currency, and investing in a higher interest-rate currency.		Like all speculative trades, it depends - for a favourable result - on prevailing market rates and prices turning out at the levels expected, or hoped for.


			A foreign exchange carry trade involves borrowing a low interest-rate currency, and investing in a higher interest-rate currency.


	The potential benefit to the trader is the interest differential between the higher interest income receivable on their investment, and the lower interest expense payable on their borrowing.		The potential benefit to the trader is the interest differential between the higher interest income receivable on their investment, and the lower interest expense payable on their borrowing.

			The favourable interest differential is known often known as the "carry".


	The downside is the loss on the likely depreciation of the higher interest-rate currency invested in.		The downside is the loss on the likely depreciation of the higher interest-rate currency invested in.

	The expected currency depreciation is predicted by the International Fisher Effect.		The expected currency depreciation is predicted by the International Fisher Effect, which predicts that higher interest rate currencies depreciate - on average - by amounts equal to the interest rate differentials.


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	The trader hopes that they will be able to enjoy gains on the interest rate differential and then close out the trade, before any sharp weakening of the higher interest rate currency.		The foreign exchange trader hopes that they will be able to enjoy gains on the interest rate differential and then close out the trade, before any sharp weakening of the higher interest rate currency.


	~~Also~~ known as a ''currency'' carry ~~trade~~.		Carry trades are also known as a ''currency'' carry trades.


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	:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.		:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.


	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an offsetting exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an offsetting exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.
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	2. ''~~Speculation~~ - other financial assets.''		2. ''Trading - speculation - other financial assets.''

	Similar speculative activity, where the financial asset invested in can be any asset that produces a higher rate of income than the cost of borrowing.		Similar speculative trading activity, where the financial asset invested in can be any asset that produces a higher rate of income than the cost of borrowing.

	For example, ''riding the yield curve''.		For example, ''riding the yield curve'' in respect of interest rates for different maturities of funds.


			3. ''Treasury - cash management - risk management - foreign exchange risk - interest rate risk - funding diversification.''

			In a treasury cash management and risk management context, a similar trade undertaken as part of an overarching cash management or risk management strategy.


			:<span style="color:#4B0082">'''Natural hedges and prudent approaches'''</span>

			:"Considering carry trades where there is an underlying exposure is a prudent approach for corporates.

			:It helps in creating natural hedges, mitigating currency risk, enhancing cash flow matching and aligning with strategic goals.


			:By focusing on these areas, companies can leverage carry trades to support their financial objectives as part of a holistic risk management approach while minimising the associated risks.

			:This strategic alignment ensures that carry trades are not merely speculative punts but integral components of a comprehensive risk management and financial strategy."

			:''Understanding Carry Trades and How They Can Be Used: A Guide for CFOs and Treasurers - Lisa Dukes - Dukes & King -
			Treasury Management - August 2024.''


	== See also ==		== See also ==
	* [[Arbitrage]]		* [[Arbitrage]]
			* [[Carry]]
			* [[Chief Financial Officer]] (CFO)
	* [[Cost of carry]]		* [[Cost of carry]]
			* [[Covered interest arbitrage]]
	* [[Day trading]]		* [[Day trading]]
	* [[Depreciation]]		* [[Depreciation]]
			* [[Diversification]]
	* [[Emerging currency]]		* [[Emerging currency]]
	* [[Exotic currencies]]		* [[Exotic currencies]]
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	* [[Fisher Effect]]		* [[Fisher Effect]]
	* [[Foreign currency]]		* [[Foreign currency]]
			* [[Foreign exchange risk]]
	* [[Forward contract]]		* [[Forward contract]]
			* [[Funding]]
	* [[Futures contract]]		* [[Futures contract]]
	* [[FX instrument]]		* [[FX instrument]]
	* [[Hard currency]]		* [[Hard currency]]
	* [[Hedging]]		* [[Hedging]]
			* [[Interest arbitrage]]
	* [[Interest rate parity]]		* [[Interest rate parity]]
			* [[Interest rate risk]]
	* [[International Fisher Effect]]		* [[International Fisher Effect]]
			* [[Natural hedge]]
	* [[No arbitrage conditions]]		* [[No arbitrage conditions]]
			* [[Prudence]]
	* [[Purchasing power parity]]		* [[Purchasing power parity]]
	* [[Riding the yield curve]]		* [[Riding the yield curve]]
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	* [[Speculation]]		* [[Speculation]]
	* [[Straddle]]		* [[Straddle]]
			* [[Trader]]
			* [[Treasury]]
			* [[Uncovered]]
			* [[Uncovered arbitrage]]


			==Other resource==
			*[https://treasury-management.com/blog/understanding-carry-trades-and-how-they-can-be-used-a-guide-for-cfos-and-treasurers/ Understanding Carry Trades and How They Can Be Used: A Guide for CFOs and Treasurers - Lisa Dukes - Dukes & King -
			Treasury Management - August 2024]

			[[Category:Financial_products_and_markets]]
			[[Category:Identify_and_assess_risks]]
			[[Category:Manage_risks]]
	[[Category:The_business_context]]		[[Category:The_business_context]]

			[[Category:Financial_products_and_markets]]
	[[Category:Identify_and_assess_risks]]		[[Category:Identify_and_assess_risks]]
	[[Category:Manage_risks]]		[[Category:Manage_risks]]
	[[Category:~~Cash_management]]~~		[[Category:The_business_context]]
	~~[[Category:Financial_products_and_markets]]~~
	~~[[Category:Liquidity_management~~]]

imported>Doug Williamson: Add links.

2022-08-04T15:40:00Z

Add links.

← Older revision		Revision as of 15:40, 4 August 2022
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	* [[Fisher Effect]]		* [[Fisher Effect]]
	* [[Foreign currency]]		* [[Foreign currency]]
	* [[Futures]]		* [[Forward contract]]
			* [[Futures contract]]
	* [[FX instrument]]		* [[FX instrument]]
	* [[Hard currency]]		* [[Hard currency]]

imported>Doug Williamson: Expand example.

2021-06-22T18:12:03Z

Expand example.

← Older revision		Revision as of 18:12, 22 June 2021
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	:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.		:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.

	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an offsetting exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.

imported>Doug Williamson: Layout.

2021-06-22T18:06:49Z

Layout.

← Older revision		Revision as of 18:06, 22 June 2021
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	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.


	:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.		:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.

imported>Doug Williamson: Expand example.

2021-06-22T18:05:15Z

Expand example.

← Older revision		Revision as of 18:05, 22 June 2021
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	:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.		:So long as there is no change in the exchange rate between the two currencies, the trader enjoys a gain of (approximately) 10% - 1% = 9% per annum, for as long as the carry trade is open. Usually measured in days.

	:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency. By an average amount that can be calculated from the interest rate differential.		:However, the International Fisher Effect predicts that the emerging market currency will weaken against the hard currency, resulting in an exchange loss for the trader (who is holding the - now weaker - emerging market currency). By an average amount that can be calculated from the interest rate differential.

	:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.		:If that didn't happen, then everyone in the market would be making such trades and earning consistent profits. Which doesn't appear to be happening in practice.