Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Understanding Carry Trade And Swaps

The Foreign Exchange market has the unlimited number of opportunities for the investor. There are many strategies or techniques that allow the trader to profit from trading currencies online. In this article, we would like to discuss two interesting ways of conducting FX trading.

Carry Trade strategy

So what is the logic behind a carry trade approach? Well, this is the strategy in which the trader sells the particular currency with the low interest rate and then exploits free cash to buy the different currency with the relatively higher interest rate. As one can understand, the trader expects to profit from the difference between the interest rates. The gain can be quite big, especially if the substantial amount of leverage was used for the trade. The difference between the rates is not the only thing that the trader looks for when applying the carry trade. Another task is to see whether the purchased currency has the potential to appreciate.

Technically, the Forex trader will benefit from the difference in the rates of 2 countries using carry trade strategy. However, the important condition is that the exchange rate between the currencies must not change. As we have said earlier, the leverage increases the profit potential for this strategy. The bigger the leverage, the larger is the profit based on the interest rate difference. The main risk is the potential fluctuations in the exchange rates, which means that the trade results may vary in the end.

The majority of brokers allow using the carry trade technique. You can learn more at topratedfxbrokers.com and see which broker will enable you to utilize the carry trade strategy in the most efficient way.

Forex Swaps

A swap in the FX trading signifies the agreement between two parties to exchange the particular amount of one currency for the equal amount of the other currency. The transaction is based on the current spot rate. Hence, the two parties give back the initially swapped amount later on using the certain forward rate. We should mention that the forward rate locks in the specific exchange rate at which the money will be swapped in the future. The interesting thing is that any changes in the interest rates of the currencies used in the transaction are completely eliminated.

Essentially, currency traders use the Forex swaps for hedging purposes. This is especially handy against the possible fluctuations in the exchange rates of the particular currency.

Conclusion

Using the carry trade and Forex swaps can be advantageous for the investors. We recommend you to take into account the possible risks. Thus, for the carry trade you should pay attention to the exchange rates and the amount of leverage used. The leverage is the double-edged sword which can enhance the potential gain, but also might increase the loss.