It seems to me that any differential between interest rates between two countries effectively amounts to a bet in the currency market that the currency of the lower interest rate country is going to strengthen against that of the higher interest rate country over the future period. ie if I borrow 100 USD at say 3% convert it to A$ at todays rates and then invest it a deposit rate of 8%, the only way I will be behind at the end of 12 months is if the USD has strengthened by more than 5% against the A$. I think this is what is referred to as Carry Trade? - can anyone confirm?
Hi TryAnythingOnce, You'll want to hedge your foreign exchange risk to insure yourself against possible AUD appreciation. Cheers, Dan
Sorry BV, Further USD appreciation/AUD depreciation... If you take out a USD$100,000 loan and the AUD/USD is $0.90 (It used to be ). You'd have to pay back $111,111 If the AUD/USD suddenly dropped to $0.65, you'd have to pay back $153,846 If you didn't have some sort of protection against USD appreciation/AUD depreciation. Cheers, Dan
that's exactly the point I don't understand... Given the interest rate differential suggests the currency markets expect the USD to further strengthen against the A$, I would have thought someone would be prepared to pay me to lock in todays USD / A$ exchange rate?
