Forex Financial Spread Bet on Pound / Yen (Sept) - Online FX Trading
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The Yen has profited from the current state of the markets. Investors continue to reduce their risk and have been pulling out of the ‘Carry Trade’ market. The NZ Dollar has fallen nearly 14.5% and the Aus Dollar 10% again the Yen. Sterling has also seen falls against the Yen.
Forex Carry Trade:
This is where investors borrow low-yield currencies and invests the funds in high-yield currencies. In the normal course of affairs investors sell the currency they have borrowed and change it into other currencies. That will of course weaken the target currency (the one being borrowed).
If the Carry Trade is reduced then investors could expect the target currency, in this case the Yen, to strengthen. And that has been seen in recent days.
Example: an investor borrows ¥5,000. They convert the Yen into Sterling and buy bonds with the funds. If the bonds pay 4.5% and the Japanese interest rate is 0.5% then the investor should profit at 4.0% (ie 4.5% - 0.5%).
That should work if the exchange rate does not alter. This sort of leverage can be very profitable and the margins have been large enough to cause a large Retail business on top of the expected Fund business. If the investor uses a leverage of 10:1 then they can stand to make a profit of 40% (4.0% x 10).
The problems start if Sterling falls against the Yen. If that happens there is a risk of losing. Again because of the leverage, the losses can multiply rapidly.
With the Carry Trade becoming more risky and the Yen strengthening against the Pound that makes the Carry Trade even more risky. That further reduces the Carry Trade and further strengthens the Yen. And so on.
So how can you profit from this? One option is to spread trade on the Forex Pound / Yen markets, ie selling the Pound against the Yen.
eg
spread trading on the Sterling/Yen
(Sept) price going below 224.86 by 14 September.
For the £/¥ market, you trade in £X per point, where a point is 0.01 of Sterling/Yen movement. If your stake is £20 per point and the Sterling/Yen moves 0.04 then that would be an £80 difference to your profits.
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Forex example: Selling the Pound v the Yen
Let's say you see the live price on a spread betting website like FinancialSpreads.com and it displays a spread of 224.74 - 224.86 and you have done your research and think that the Sterling/Yen (Sept) price will should go down below the 224.74 mark.
Therefore you sell at 224.74 for a stake of £10 per point.
So if, let's say that by the market closing date of 14 September the £/¥ (Sept) market closes at 224.62.
Your profit and loss is calculated by taking the difference between the value you sold the market at, ie 224.74 and the settlement value of 224.62 and then multiplying that by the stake per point of movement.
Profit / Loss = ((224.74 - 224.62) / 0.01) x £10 per point stake.
= (0.12 / 0.01) x £10 per point stake.
= £120 profit.
But if the market didn't move as predicted and had the Sterling/Yen (Sept) price gone up and closed at 224.88, then you would have made a loss.
Profit / Loss = ((224.74 - 224.88) / 0.01) x £10 per point stake.
= (-0.14 / 0.01) x £10 per point stake.
= -£140 loss.
Forex Daily Rolling Market for Sterling / Yen
In the above you can see how the Forex Daily Rolling Market for Sterling / Yen has climbed since the Near Year and seen a large drop since 17 July.
'Spread Bet on Sterling / Yen (Sept) - FX Online Spread Betting' by DB, updated 16-Aug-07
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