Could we say “Speculate on FX forward and carry trade are basically the same idea. If the fx rate do not move, earn the interest rate differential”?
For example, US investor long 1yr AUD agn USD. If the AUDUSD spot do not move one year later, investor earn the forward discount (approximate interest rate differential, 2.5%). (1yr AUD rate 3%; 1yr USD rate 0.5%)
In other word, we can implement carry trade via fx forward.
Do I miss anything? Thanks!
Frank, implementing the Carry trade is the same as trading the Forward Rate Bias (not sure if that’s what you mean by “FX forward”). if so, yes you are correct. however, keep in mind that implementing the carry trade isn’t done through currency forwards specifically.
Carry Trade (forward rate bias) = buying high yield currency (buying currency at fwd discount) and selling low yield currency (selling currency at fwd premium).
Thanks for posting that question FrankCFA and JuniorCk8 for the response. Together, this cleared up some question I had about what “trading against the forward rate bias leads to lower hedging ratios” means - what FrankCFA posted is how you trade with the forward rate bias so all now makes sense. This forum is so helpful!
Thanks, usually we don’t use fx forward to play carry trade. However, for long-only fund with active currency management/ overlay strategy , the fund has the flexibility to use fx forward to play currency. The fund can’t borrow low interest rate currency( Long-only natural). The only way to play carry trade is via fx forward. This is what I heard.