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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (28143)	3/8/2005 6:43:52 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 110194

The pricing of currency forward K's include the rate differential. yep, otherwise people could just print money--simply leverage long bonds in a higher-yielding currency than you start with, and simultaneously short the currency out to term to hedge currency risk. sounds good in theory! but as one looks at this trade with real money on the table, it becomes apparent that the price at which you can short the forex at the term equal to your bond is lower by an amount equal to the interest rate differential. i.e., the differential is already arbitraged away by the market. before i got into foreign bonds i used to think the higher-yielding currencies were chronically backwardated. like the NZD strip: sites3.barchart.com but really, it is just closing the interest differential so that nobody "eats for free" :) thanks for stepping in to clarify...

To: LLCF who wrote (28143)	3/8/2005 8:09:42 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

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 Well in this case, not only are they NOT collecting the entire rate spread but they would be better off just doing the whole ENTIRE mess in US$. In short the YEN carry trade sucks compared to straight US$ carry!!!!! Mish