Carry (investment)

Currency Carry Trade (also CCT) is a speculation strategy in which a speculator borrows in a currency with a relatively low level of interest to them to buy interest-bearing securities, which are listed in another currency with higher interest rates. He hopes this is that due to the higher interest income after loan repayment still remains a profit. The risks associated with this speculation are made in exchange rate fluctuations and interest rate changes.

Mechanism

The yield on the currency carry trades is accordingly composed of two components:

• The difference between having and borrowing rate and
• The exchange rate development.

To reduce these risks, interest rate fluctuations, the exchange risk can be reduced through forward market transactions are eliminated on fixed-income businesses and. However, these hedges reduce the expected return ( in a complete hedge the risks would yield zero).

Example

An investor borrows money in yen because he pays only 0.5 % interest there, and invests in USD, since he receives 4 % here. As long as the exchange rates are stable or, as is common, to move in narrow corridors, the business is profitable. If the yen but how in the October 2008 crash rises within a few days by more than 10 %, then the investor loses massive money because he has to pay back the loan in yen. Therefore, the investor tries to quickly get out of the business in order to limit its losses. However, this means that he buys yen for USD and thereby the yen continues to rise.

Relevance

According to the interest parity theory, such forms of investment due to the onset of arbitrage should not be expected. Contrary to the predicted by the theory lack profitability, currency carry trades, however, have proven in recent years as highly profitable. The German Bundesbank has calculated for the period from January 1999 to June 2005 a theoretical average annualized return of 15 % for a carry trade strategy between Euro and U.S. dollars.

In Bulletin 2008/2 Luxembourg Central Bank assumes that the coordinated interest rate cuts by central banks in early October 2008, the carry trade slowed down and led to the unwinding of speculative positions.

The interest rate speculation, in which investors borrow in countries with low interest rates and the waning currency money and invest it in higher-yielding countries amounted in the period from March to December 2009, when the euro rose from 1.23 to 1.51 U.S. dollars, at $ 1.5 trillion. This sum had strong effects on risk transactions such as stocks, oil and raw materials. After the dollar will be back later estimated the volume of this trade had declined rapidly.

Accruals

Currency carry trade are not to be confused with arbitrage transactions. In these (which is by far the largest volume of foreign currency total market), market participants buy and sell currencies on different exchanges at the same time to take advantage of ( even minimal ) price differences. It is essential that the dealer at the positions offsetting arbitrage transactions immediately again (and thus bear no market risk ) while speculators hold open positions in the currencies in Currency Carry Trade for the duration of the transaction and thus take risks.