What is foreign exchange overnight interest? What's the difference with carry trade
In foreign exchange trading, there are two terms that investors must know, namely, overnight foreign exchange interest and carry trade. What do they mean? What do they mean?
What is foreign exchange overnight interest?
The so-called overnight interest on foreign exchange refers to the interest paid (earned) by investors overnight. The settlement time is 5 p.m. EST every day. Buy which kind of currency, then earn which kind of interest, on the contrary, is to pay the corresponding interest, so, when investors trade a pair of currencies, if the interest of the currency bought is higher than that of the currency sold, then the overnight interest is positive, investors who speculate in foreign exchange can get profits from it, if the interest rate of the currency bought is higher than that of the currency sold If the interest rate is low, foreign exchange investors will have to pay overnight interest, and the corresponding transaction cost will increase.
Foreign exchange overnight interest and carry trade
For example, for the EUR / USD currency pair, if the upper interest of the speculator is -0.53, it means that the speculator buys 10K (0.1 standard hand), then the currency pair needs to pay the overnight interest of $0.53. If the upper interest of selling is 0.25, it means that the speculator sells 10K (0.1 standard hand), then the currency pair can bring the overnight interest of $0.25.
Well, here we will find that the price of the currency pair itself has not changed, but investors can still get us $0.25 a day. So what's the reason?
Here we need to mention another concept of carry trading.
What is carry trade?
Carry trade is to obtain interest income as the purpose, use different countries and regions, different interest rates in the short term, borrow low interest currency, transfer funds to high interest currency, and long-term holding strategy, which is also called carry trade.
Carry trade is usually used in currency pairs with large interest difference. Of course, carry trade also has risks. The currency interest rate is floating, and the overnight interest paid or earned by traders will fluctuate. At the same time, the purpose of carry trade can only be realized when the currency exchange rate is stable. Therefore, we must adjust the arbitrage market operation
So far as the content of overnight foreign exchange interest and carry trade is concerned, there are a lot of foreign exchange speculation techniques and basic knowledge. Investors must make clear the most basic things before they speculate in foreign exchange.
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