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AdrianWS

FX carry interest rates volatility
Posted on 15 July at 18:10 GMT by AdrianWS
Introduction:

I’ve written a lot about Carry, and its uses in trading FX recently. In this article, I will look at how most efficiently to structure a carry portfolio across the varying risk levels. A simple re-cap of what FX carry is, is that you buy high yielding currencies, while simultaneously selling low yield currencies, in order to receive the difference in interest. The idea behind this comes from interest rate parity pricing of forward FX contracts (I went into detail here), but basically, the future value of a currency should discount any interest rate difference. I.e. at its heart, when you buy a higher yielding currency, the main objective is not that the currency increases in value, just that it stays above the forward value of the currency so that you gain Carry. However these particulars are not too important, what is important is how we structure a portfolio to suit our needs most effectively.


As discussed previously, the generic go to carry portfolio for G10, is buying the top 3 yielding currencies, whilst simultaneously selling an equal amount of the 3 lowest yielding currencies.

As a reference point, here is a table of 2Y swap rates for the currencies with…
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The Carry Trade
Ranking 6/26
FX Carry swaps interest rate
Posted on 6 July at 17:08 GMT by AdrianWS
Introduction :
I've looked at the Carry trade in short bursts across previous articles, but I thought I should have a more detailed look at them this time around. Furthermore, I want to explore some other possibilities around the carry trade, such as the best way to bet against it and so on.

First of all though, we need to consider that carry is in fact a very powerful aspect, it really is. I will demonstrate this by first looking at the Argentine Peso. Now the ARS is no ordinary currency, sure. In fact it currently has a yield of around 32%! as shown by this chart.

We must remember that in late January this year, the ARS crashed 15% in one day. A huge move, something frankly unthinkable for a major currency such as the EUR or AUD. This huge volatility is why traders and investors demand such a high interest rate.

But even though the ARS had a devaluation event earlier this year, it is still positive YTD. That is, if you had bought the ARS on January the 1st, you would have made money.

This to me is an absolutely incredible reminder at how powerful carry is! As even after a currency crashes, the interest afforded to you still means you profit.

A longer time series shows the q…
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