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Carry Trade

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Carry-Trade : Playing the Carry-Trade Game Each foreign currency has a central bank that issues an overnight lending rate. This is a prime gauge of a currency’s value. In recent history, low Interest rates have resulted in the devaluation of a currency. Many analysts assume this is a function of the carry-trade strategy, employed by many hedge funds. This is a trade where one buys and holds currencies in a high-yielding interest rate market, such as the United States, and sells or borrows money from a foreign country where the currency is in a low-yielding interest rate market, such as exists in Japan. There is a significant risk exposure to this investment, which requires large capital, or a highly lever-aged position from an exchange-rate fluctuation.

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