I have been having a discussion with my father re these questions, and can someone please clarify the answers for me:
Consider the usd/jpy. If one buys 1 lot or $100000 of usd, and the current rate for the base currency is 120 yen, the he will exchange 12000000 yen for
$100000. He will have bought the usd and sold the yen. He will be charged a carry rate, he will pay interest on the 12000000 yen and receive interest on the usd, differential is called the swap. Right so far? Now why does he have to pay interest on the currency sold, the yen, and why does he receive interest on the usd?
Now, assume the usd rises to 150 yen. When you sell the usd and buy the yen to unwind this transaction you convert 12000000 into $, right?
but if you convert back to $ you will lose money on the transaction, because the $ rose in value?
thanks,
Liz
Consider the usd/jpy. If one buys 1 lot or $100000 of usd, and the current rate for the base currency is 120 yen, the he will exchange 12000000 yen for
$100000. He will have bought the usd and sold the yen. He will be charged a carry rate, he will pay interest on the 12000000 yen and receive interest on the usd, differential is called the swap. Right so far? Now why does he have to pay interest on the currency sold, the yen, and why does he receive interest on the usd?
Now, assume the usd rises to 150 yen. When you sell the usd and buy the yen to unwind this transaction you convert 12000000 into $, right?
but if you convert back to $ you will lose money on the transaction, because the $ rose in value?
thanks,
Liz