Yen Carry Trade

Currency carry trade

A currency

carry trade occurs when people borrow in one currency and invest in another country in their local currency. carry trade is trade which is carried out b/w Japanese Yen and another country currency. cost of carry is the cost of carrying or holding a position.

Yen

The

Example
For

example, suppose 5%

Japanese interest rates = 0% US interest rates = 1 US $ = 100 Japanese Yen (Assumed) Borrowed 1,00,000 Jap. Yen Inv. in US(after converting in dollar = 1000 USD)

Interest earned = 50 USD

PAYING LOAN BACK

If US $ becomes weaker or Jap yen becomes stronger 1 lac Jap. Yen USD = 90 Yen ( 90*1050 = 94,500) 5,500 will be loss on this trade.

HISTORY
The first wave of carry trade started in the late 1980s .
Borrowed in yen and invested in European securities. First phase ended in 1993 after the Japanese bubble collapsed.

EFFECTS
Speculators invested in overseas equities on a leveraged basis, when stock prices decline, they are forced to liquidate their equity positions to meet margin calls. This in turn causes the equity markets to tumble further. When the speculators and investors converted their foreign equities into yen, that appreciated the yen currency. Hence, the investors are dealt a double whammy: not only have they lost on their equity investments, they now also lose from the yen currency appreciation.

Problems with Yen Carry Trade

The only problem with the Yen Carry Trade is potential fluctuations in the exchange rates. If the US dollar depreciated then an investor would see his profit wiped out. In a period of exchange rate uncertainty, it becomes less attractive to engage in any currency carry trade.

FEATURES
Impossible to measure the total size of the yen carry trade

Absolutely massive
Magnitude of trade is very high Many experts believe its end will be very devastating for capital markets throughout the world

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