Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

Nick1984

Interest Rate Parity

Recommended Posts

I've never traded forex in my life but have always been interested in it. Anyone who trades regularly may be able to answer this. Does interest rate parity exist in the real world? Eg. Is it really worth your while borrowing Yen and coverting it to USD,EUR,AUD etc to gain from higher local interest rates then converting back to Yen to repay your loan?

 

From all I've learnt, IRP states that because the interest rate in the Yen is much lower the currency will appreciate relative to which ever currency you convert to so that when you convert back the gain is neutralised and your still overexposing yourself to translation risk.

 

On a side note, how often do you guys find yourselves spotting arbitrage opportunities i.e like triangular arbitrage?

 

Cheers :)

Share this post


Link to post
Share on other sites

Good question, but I'm not the right guy to answer that. Maybe Buk or Texxas might be better experienced in giving this type of strategies. I'm just a straight arrow GBPUSD trader, not looking at crosses and correlations, etc. They are interesting but these strategies require a higher degree of accuracy and of course computer-aided software to calculate the differences. Just my perspective though.

 

I recently read an article on the Yen and Japenese economy blaming hedge funds and other institutions for using large amounts of CARRY TRADE, basically borrowing/buying the target currency of that country in order to profit higher interest rate of that country. Sounds valid but it's causing some unwanted volatility.

Share this post


Link to post
Share on other sites
Is it really worth your while borrowing Yen and coverting it to USD,EUR,AUD etc to gain from higher local interest rates then converting back to Yen to repay your loan?

 

 

If you’re talking bout actually “trading†the physical instruments, which I guess you are? then all you're seeking is value & prospective cross compounding, yeah?

 

As you say, the carry exists because of the interest rate differential between the trading nations. Money shifts around seeking high yield. The buck & Sterling currently benefit from a + 5.2% bias on the differential, whilst the EU attracts + 3.25% yield over the Asian currency.

 

If you look at a Daily chart based on those trading partners you’ll see the positive flow in positioning yourself short Yen (Long Dollars, Sterling & Euro)

 

Unless the rate differential gets squeezed (Yen rates increase and/or the others deflate), then nothing will really unseat the carry advantage, & traders will proportionally leg into yield advantage.

 

Sure, every once in a while outside influences spook the fast money or shorter frame speculators, but if the generic fundamentals hold good, then the long range players will merely soak up those pullbacks to buy more contra Yen positions.

 

As a trader, your prime objective is to seek value & compound profits. By exploiting the carry, spread across the array of cross instruments, you're utilizing positive bias.

Share this post


Link to post
Share on other sites
I've never traded forex in my life but have always been interested in it. Anyone who trades regularly may be able to answer this. Does interest rate parity exist in the real world? Eg. Is it really worth your while borrowing Yen and coverting it to USD,EUR,AUD etc to gain from higher local interest rates then converting back to Yen to repay your loan?

 

From all I've learnt, IRP states that because the interest rate in the Yen is much lower the currency will appreciate relative to which ever currency you convert to so that when you convert back the gain is neutralised and your still overexposing yourself to translation risk.

 

On a side note, how often do you guys find yourselves spotting arbitrage opportunities i.e like triangular arbitrage?

 

Cheers :)

 

With regards to Triangular arbitrage it is very doubtful that as an assumed retail trader even if you spotted an opportunity, that you could execute across the 3 currencies quickly enough & cheaply enough without slippage, to benefit.

 

Unless the rate differential gets squeezed (Yen rates increase and/or the others deflate), then nothing will really unseat the carry advantage, & traders will proportionally leg into yield advantage.

 

A number of scenarios exist for this;

*BoJ raising rates

*US,NZ,AUS,UK etc lowering rates

*Yield spreads opening

*Flight to safety

*Maturities

*Depreciating asset classes [for the more aggressive]

*Rising Yen [on speculative buying pressure]

 

jog on

d998

Share this post


Link to post
Share on other sites

If you're asking whether there's a no-brainer way to make money then the answer is no. If you buy USD/JPY then you'll receive interest every night. That's the "carry trade". The risk of course is that USD/JPY falls and you close your position for a loss.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • VRA Vera Bradley stock watch, pull back to 5.08 support area at https://stockconsultant.com/?VRA
    • MU Micron stock watch, pull back to 102.83 gap support area with high trade quality at https://stockconsultant.com/?MU
    • ACLX Arcellx stock watch, trending at 84.6 support area with bullish indicators at https://stockconsultant.com/?ACLX
    • Here’s something few are talking about: The Chinese are printing money like it's going out of style. Not that you'd hear about it in the mainstream news. But Bitcoin knows.   Bitcoin always knows.   Here’s the thing…   When the Chinese government prints money to paper over the cracks, their smart money doesn't sit around waiting to get devalued.   It usually flows into three things: Bitcoin, gold, and dollars.   After years of being beaten down, gold's having one of its best years in decades. But here's the secret -- whatever gold does, Bitcoin's going to do it bigger.   Much bigger.   Since last November, when China started their printing spree, Bitcoin's been moving in near-perfect correlation with the People's Bank of China's balance sheet. Over 80% correlation, maybe even 90%.   Again, few are talking about it.   But here's why this matters right now: This could be the beginning of a huge breakout in the crypto markets.   Bitcoin broke above its July high, and historically, that's led to new all-time highs over 90% of the time. The only times it failed? COVID and the 2022 bear market.   That's it.” – Chris Campbell   Profits from free accurate cryptos signals: https://www.predictmag.com/     
    • Originally Answered: How can I compete with people who are better than me in every way?   So you want to outcompete people who are smarter, better looking and more experienced than you?   No problem!   All you have to do is outwork them.   Will Smith said, "if we both get on a treadmill either you're going to get off first or I'm going to die trying."     Most people just aren't willing to work that hard. Sure, they'll show up for the job interview and maybe practice in front of the mirror for a few minutes, but they won't do hours and hours of research and prepare for weeks. They won't wake up early and stay up late working on their dreams.   So while all those smart, good-looking, experienced people are waiting around for the next opportunity to come their way, you can outwork them and create your own opportunities.   In a few years, you'll be that "smart" person everyone looks up to. But you'll be different. You'll know it was your hard work, your inner strength and your commitment to living a great life that made you successful and brilliant - not luck or good genes.” – Tom Corson-Knowles, Quora Profits from free accurate cryptos signals: https://www.predictmag.com/   
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.