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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: russwinter who wrote (28098)	3/8/2005 6:09:00 PM
From: LLCF	Read Replies (2) of 110194

<Mish, in a yen carry trade they hedge and largely neutralized against the currency risk. I'd say right now that carry trade is still alive and well, and will be as long as the rate differential is there, and in fact is getting larger.> I'll start by saying that I DONT KNOW what the i-banks are doing on the carry trade at the moment and haven't looked to see what the future are implying... BUT: Normally a rate differential does not a HEDGED carry trade make because the currency forward or futures include this differential in their pricing. ie. The pricing of currency forward K's include the rate differential. Or in Mish's words from his ensuing post: <<Currency hedges are not cheap.>> In fact the price of the currency hedge is BASED on the interest rate differential.. there is no free lunch in general... of course there are times where day to day the i-banks can accumulate these trades due to flow factors in the market. Thats how they get these trades on, but they ARE NOT EVER collecting the entire i rate spread that I"ve ever seen. DAK

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