Forex Options Trading - Currency Carry Trade

Probably the most popular strategy in forex trading is the currency carry trade. This involves selling a currency with low interest rate and using the funds to buy a whole different currency with much higher interest rate. The strategy works best for traders who want to capture the differences of the interest rates of two currencies which actually turn out to be substantial depending on the amount of leverage a trader uses.

To illustrate, if a trader chooses to sell a thousand Japanese yen with an interest rate of 0%, convert the funds into U.S. dollars and then buy another currency of an equivalent amount that pays a bond of 4.5%, the trader will automatically gain the 4.5% profit given that the exchange rate of the two forex currencies remain the same. This may not sound like a considerable amount of winnings but when you take into account the amount of leverage a trader uses, the gains become quite large. Again to illustrate, if the leverage in this case is 10:1, the trader may profit up to 45%.

The same thing happened back in mid-October 2005. The New Zealand dollar yielded 6.75% interest rate up to 7% before the month of October ended. At the same time, the Japanese yen yielded 0% based on the Bank of Japan's zero interest rate monetary policy. This forex market status is the perfect atmosphere for a currency carry trade. That time, it is said that traders have won greatly into the cross as the value increases up to 400 pips between July and October 2005.