Two-Fold Carry Trade-

Some people can refuse to give in to the temptation of free money. Hence the recent fashion for stoozing has reached to their rescue. Stoozing is a slang term used to describe the act of borrowing money at 0% (typically on credit cards) and earning interest on the money and paying it back before the 0% period ends. In effect, it is free money for little work as long as the borrower is good with paper work and can keep up the minimum payments required. Hence those few people were borrowing large sums on credit cards with a 0% interest rate and investing the proceeds in a savings account.

But soon Stoozing has gone out of the trend since most credit cards began charging a balance transfer fee.

But not to worry, there is new fashion now in institutional circles, the same stoozing goes by with a more respectable name called carry trade. But the principle is the same; borrow money at a cheaper rate than you can earn on an investment elsewhere, then sit back and enjoy the profits.

But the big difference is that carry trades are a lot more dangerous than stoozing.

• Firstly, rather than being invested in a safe savings account, the money increasingly flows into riskier places, such as emerging market assets.

• Secondly, carry trades are often cross-currency carry trades, which carry extra risks.

In a currency carry trade, the speculator borrows money in a low-interest rate currency and buys higher-yielding assets in a different currency.

These days, the low-rate currency is generally the Japanese Yen; the higher-yielding assets are often US dollar bonds or the U.K Bonds or Currencies.

The carry trade is alluring many because of the type of returns it earns and especially when the earnings are invested in bonds. But state you for every thing there exists two-folds.

On one side of the coin carry trade fetches more money and has a steady income stream, but on the other side the carry trades can go from profit to loss with almost no warning. There is no intimation of arrival of losses in carry trades, they are like cyclones, coming all of a sudden and taking away everything from us.

So before going for any carry trade pop up the pros and cons and then proceed buddies.

Last Week the Yen was hammered in the forex market. The Bank of Japan Meeting has decided to keep the interest at 0.5% the lowest among all the major currencies. This news has made the carry traders continue to rejoice with the non-move in the interest rates.