An interesting comment just appeared on an old blog of mine:
Can you explain, how can a individual investor borrow yen to buy CAD$?
It’s a good question. The fact is that there is a huge universe of investment opportunities which are simply not available to individual investors, and the situation is getting worse. The financial markets love coming up with interesting and innovative new structures for investors to buy, often based on credit default swaps or mortality indices or something equally obscure — and while hedge funds pile in, individual investors are left out in the cold, stuck with crappy old equities. It’s weird — there’s pretty much no riskier investment than buying an individual stock, but retail investors can do that pretty easily, and can even, with a bit more difficulty, buy options on individual stocks. But if they want a much lower-risk investment like an AAA-rated tranche of a CDO, fuhgeddaboudit.
The carry trade is a bit like that: while borrowing yen is a no-brainer for a hedge fund, it’s much harder for an individual. And even if your local bank was willing to lend you yen, I’m sure they’d do so only at a ridiculously high interest rate.
Even if you had a bank willing to do some kind of JPY-CAD swap for you, I still can’t see how an individual can really do this trade with nothing but a bunch of margin. The long side is easy, of course — just go along to Everbank and open a foreign-currency account. But the short side is much harder. You’d think with all the crazy mortgages on offer in the US, someone would have had the bright idea of offering mortgages in yen. But so far, to my knowledge, that hasn’t happened.
Answer: open a commodities account, deposit a few thousand dollars in margin and sell Yen futures. Mini-size contracts represent Y6.25m, or a little north of $50k. Go ahead and buy CAD from Everbank if you prefer that, or better yet, just buy a CAD future (CAD100k-sized).
Now, CDO tranches, those the little guy really can’t get, but currency trades are cheap and easy.
“there’s pretty much no riskier investment than buying an individual stock..” – there is always the fx market, with some outfits offering up to 400:1 leverage. Combined with low spreads and decent interest payments on currencies, I would say the FX market is a superbly efficient way to get in on the carry trade. Firms like Oanda (one of the more reputable players) pay interest by the second, with spreads and interest rate spreads likely to be close to what the hedge funds are paying/receiving. This makes yen/swiss franc carry trades perfectly feasible for the retail investor, if they are that way inclined.
There’s also FXC, a Canadian-dollar linked ETF — I assume it holds safe, short-term Canadian-dollar denominated paper. And you can short FXY, presumably. That gets you pretty close.
IF you like to do carry trade you can use the futures/forwards market.
Easy Forex offer spot and forward trading..
Buy CAD/JPY forward…since CAD has higher interest rate than JPY. CAD/JPY sells at a discount in the forwards market (relative to the spot). YOu can apply low leverage if you want to reduce the risk involve in fx trading.
ARTIFICIAL YEN LOAN
is a combination of USD LOAN+ LONG ON USD/JPY FORWARD CONTRACT.
net effect: interest rate gain on USD/JPY forward contract reduces the interest rate on USD loan. Its like borrowing JPy but slightly complicated. risk remains if value of JPY rise.
BENEFITS:
Carry trade
Risk:
if the value of the yen rise relative to the dollar.
But how does a hedge fund borrow in yen? Do they get direct loans from Japanese banks (or other banks for that matter, which can lend in JPY)?
Hedge funds in general borrow yen directly from their Prime Broker. An example of a prime broker is Morgan Stanley, Goldman Sachs and UBS. The prime broker borrows yen from Japanese banks and lend that yen to hedge funds. Quite often US dollar denominated hedge funds that invest in Japanese securities never actually forex their assets under management into Japanese yen. What they do is keep the $US on deposit with thier prime broker earning LIBOR interest rates which is around 4.5% and borrow yen for all their transaction needs. The cost of borrowing the yen is in general half the interest they are receiving on their $US deposit.
Ilive in australia looking to borrow the yen to buy property there.Intrest rates here are 2.5% for the yen.How can i borrow from Japan to get a better rate.
This site is good and helpful
john
This site is good and helpful
john
I’m a retail investor in London, UK. I want to borrow Yen at the current low rates to invest in the currency markets. How can I access such a loan?
I never knew this. This is very informative and very interesting to know.
i would like to borrow yen , change to 1 million new zealand dollars to buy 52 % of public company and recapitalise it and look for aquisitions for profit