Talk:Carry (investment)

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Just to mention the last part of the text is almost the same as : http://www.investopedia.com/terms/c/currencycarrytrade.asp

Maybe one site or the other should mention credits !!

++ Guillaume

[edit] Yen Carry Trade 'Myth'

Interesting claims 70.73.4.197, however I would be interested to see some references, not just to improve the article, but for my own personal benefit. Cheers. Suicup

Hi. I will work through an example for you. In most Western economies, money borrowed to invest is tax deductible. In other words, you are only taxed on net profits associated with a business or investment venture such as a 'carry trade' in assets, cash, bonds, or commodities.

So let's say the hypothetical 'carry trader', as typically depicted in the financial media, is borrowing Yen at 0%, and investing in US treasuries or overnight repos at 5.25%. Sounds like a profitable trade, right? Read on.

Now, consider that said trader pays a marginal income tax rate of 40%. And consider that Japan has been in deflation for the past number of years, at deflationary rate of -1%. In the same time period, US inflation has been running at roughly 2.5%.

The 'real' cost after-tax cost of Yen = nominal after-tax cost - rate of inflation. The 'real' return on USD assets = nominal after-tax returns - rate of inflation.

So, for the Yen borrowing, the calculation is 0% * (1-40%) = 0% - (-1%) = 1% And for the USD investment = 5.25% (1-40%) = 3.15% - 2.5% = 0.65%

So the real rate of return on USD investment is 0.65%, while the real cost of Yen borrowing is 1%. Since the real cost of Yen borrowing exceeds the real return on USD investment, a so-called 'carry trade' should not have an expectation of profit.

Hedge funds and other institutional players are usually intelligent enough not to engage in activities that do not have expectations of profit.

Therefore, it can be argued that all the talk in the financial 'media' or even in the 'Economist' about a so-called profitable 'carry trade' is complete nonsense. It is true that there might be some speculators who have placed (and done well with) bets against the Yen in recent years since the bubble burst in the 90s, but to confuse such with a profitable 'carry trade' defies logic.

Another common theme of the financial 'media' is to claim that Japan is a source of liquidity to the world. Low interest rates actually reduce liquidity as interest payments are not being made on loans, and thus, money isn't available for financial intermediaries to recycle back into making new loans. The money supply in Japan has been steadily declining for at least the past few years, yet world stock markets have been reaching new highs, and assets of all kinds have been bid to sky-high valuations. Thus, it can be argued that the asset bubble is being driven by money supply expansion in Europe and the United States, and not by the shrinking money supply in Japan.

The bottom line is that I don't feel this will have a happy ending for the United States. The dollar has dropped 5.5% in the past week, which, for the world's largest economy, is pretty much on the threshold of a currency crisis.

70.73.4.197 05:24, 5 March 2007 (UTC)

That is all very well, however a couple of things: Japan is not experiencing deflation right now, hence the positive interest rate bias of the last few months. Thus, even if the profitability of the 'trade' is less due to tax etc as you claim, it would still be profitable. Secondly, you say 'many economists' in the article, so there must surely be considerable citable evidence debunking this 'myth'. If there isn't, 'many' would be against Wikipedia's weasel words policy. Either way, thanks for your input and I look forward to those sources - as a finance student I am interested in these issues. PS you seem to do a lot of edits, perhaps you should consider creating an account. Suicup 11:17, 5 March 2007 (UTC)

I removed the following passage because it is not cited. If cites can be found to support it, add it back. Abe Froman 20:47, 5 March 2007 (UTC)

However, many economists have debunked the myth of so-called 'carry trades' by noting that, in global finance, interest rates and the values of currencies eventually converge, thus making it impossible, on average, to realize a profit through a 'carry trade' in currency alone in the long run.^{[citation needed]} Taxation also makes the prospect of a 'carry trade' in Japanese Yen very unlikely. For example, a trader borrows Japanese Yen at 0%, and invests in USD$ assets at 5.25%. The trader does not receive a tax write-off for the Japanese Yen borrowed at 0%, since no interest is actually payable, but the trader must declare interest and capital gains in USD$ assets. The combined effects of taxation, as well as an expected appreciation in the value of the Yen due to deflation results in a so-called "yen carry trade" being a net destroyer of value. Thus hedge funds or investors are unlikely to engage in such transactions, debunking the myth of the 'yen carry trade' in the media.^{[citation needed]}