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Strategies & Market Trends : Currencies and the Global Capital Markets -- Ignore unavailable to you. Want to Upgrade?

To: Daniel Chisholm who wrote (649)	9/25/1998 4:27:00 PM
From: Henry Volquardsen	Respond to of 3536

Hi Daniel, sorry for taking so long to answer this. The 'yen carry' trade is a term that gets used to describe lots of different trades and is used very imprecisely. In fact the way I look at markets there really isn't a carry trade. Carry is just one part of the trade. Look at the example you give; borrow yen, convert to dollars and invest in Treasuries. At a 5% interest rate differential the carry you earn on the trade will be .014% of principal per day . Compare that to the price volatility in the Treasuries that you are long and the price volatility of the exchange rate. So in the trade you describe I would say that you really have a long dollar/short yen trade and possibly a long treasury trade with a carry component that adds to the return. So in my view the array of trades that are being called yen carry trades are in fact speculative positions funded in yen. Take the yen carry trade that was recently unwound driving the exchange down 10 big figures. A number of hedge funds were long emerging market assets where the could earn 25%+ and funding it yen. When Russia started melting down the emerging market currencies start to weaken wiping out the carry gain and forcing traders to cover. As far as some of your specific questions. You can borrow the yen from anyone who has the capability to lend. Any major bank can facilitate such a loan. The borrowing can also be imbedded in a transaction such as when you buy or sell a currency for forward delivery. The rate at which the borrowing can be done depends on the credit worthiness of the borrower. For big good credit financial institutions this is the rate in the eurocurrency markets, libor. Pricing on embedded transactions generally pegs off of these because of the liquidity and ease of access. The terms of the borrowing are also flexible and can be easily tailored as the situation requires. The article you reference from Yahoo is referring, I believe, to a one currency carry trade. In the example the investor buys a 90 day yen t-bill yielding .335%. He gets the money to purchase the bill by pledging the bill as collateral for a one week loan at .05%. He then picks up .285% per annum for the week with no cash down. His risk however is that yen rates go back up in which case his next funding goes over .335% or he can't sell the t-bill at that rate. At the moment that doesn't seem likely but it is a risk nonetheless. But you are correct, you can not pledge the same security as collateral twice. Re why not avoid fx risk and buy Japanese bonds instead. That is definitely a viable alternative and a trade that is done. But once again you are really just long Japanese bonds at the measley return of 78 bps with a little carry thrown in. But you are long bonds. Henry