The Natural Ups And Downs In Currency Carry Trade Strategy
Carry trading is a highly risky business which is rewarding to the investor or carry trader. First, the business is dependent upon the interest rates which are not necessarily determined or influenced by the market forces, but by the government through the central bank. Monetary policies and actions by the central bank may positively or negatively affect carry trade.
Central banks act to maintain the value, to revalue or devalue the country's currency, deal with inflation to stabilize prices and may also act to either increase or decrease the commercial and other financial lending interest rates. This may cause the exchange rates between the currencies of two countries to fluctuate often. Carry traders who engage in this business must be ready to accept this real risk. Carry trade business may lead to losses if a central bank drastically reduces the interest rates. It may also be highly profitable and enable the investor or carry trader make super normal profits when the central bank acts to increase the interest rates.
Trading options can be highly profitable if done correctly. Options contracts get written on many different assets including currencies and commodities. One way is to spot trade these markets and the other way is to use options on these assets. Several currencies and commodities such as gold and copper are intimately related. You can use this options trading strategy when you find the correlations between these currencies and commodities out of sync.
For example, South Africa is the world's largest exporter of gold. Its currency Rand is intimately correlated with gold prices in the international market. When you find the spread between gold prices and RAND to be unusually wide and out of its historical relationship, you can simultaneously trade a gold call and a rand put in case the spread between RAND and gold prices is negative or the other way around.
Similarly, you can trade options if the spread between Australian Dollar and Gold prices widens and becomes out of sync with its historical relationship. You can also trade options when the spread between the Australian Dollar (AUD) and Reuters Commodity Index widens. Reuters Commodity Index is a useful index that shows general commodity prices. What you are doing is betting on the fact that the spread is wider than the historical levels and is expected to narrow down to the normal.
Article Source: FxTradingStock.com
About the Author
The world has witnessed the economic slump and because then, currency traders have been keeping their fingers crossed issues may get soon. Use forex carry trade strategy to make hansome profits in forex strategies trade.
by: Adrian Sams
Total views: 16
Word Count: 401
Date: Sun, 17 Apr 2011
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