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I've never traded forex in my life but have always been interested in it. Anyone who trades regularly may be able to answer this. Does interest rate parity exist in the real world? Eg. Is it really worth your while borrowing Yen and coverting it to USD,EUR,AUD etc to gain from higher local interest rates then converting back to Yen to repay your loan?
From all I've learnt, IRP states that because the interest rate in the Yen is much lower the currency will appreciate relative to which ever currency you convert to so that when you convert back the gain is neutralised and your still overexposing yourself to translation risk.
On a side note, how often do you guys find yourselves spotting arbitrage opportunities i.e like triangular arbitrage?
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With regards to Triangular arbitrage it is very doubtful that as an assumed retail trader even if you spotted an opportunity, that you could execute across the 3 currencies quickly enough & cheaply enough without slippage, to benefit.
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Unless the rate differential gets squeezed (Yen rates increase and/or the others deflate), then nothing will really unseat the carry advantage, & traders will proportionally leg into yield advantage. |
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A number of scenarios exist for this;
*BoJ raising rates
*US,NZ,AUS,UK etc lowering rates
*Yield spreads opening
*Flight to safety
*Maturities
*Depreciating asset classes [for the more aggressive]
*Rising Yen [on speculative buying pressure]
jog on
d998