Hedged Carry Trading

Hey all, as we all know the carry trades have been a featured attraction of the foreign exchange market and there have been strategies for retail speculators like us to take advantage of these carry trades. Strategies like opening accounts with swap and no swap brokers to hedge a pair are well known.

The yen pairs are famous for their correlation between each other and I've been wondering whether it's possible to hedge a pair with a high swap rate GBPJPY per se and another one with a low swap rate CHFJPY? and earn the swap differential.

Any mathematicians or people capable of calculating the correlations, volatility of both pairs ( for every 2 pips the gbpjpy rises, the chfjpy rises 1 pip etc) in order to come up with a good contract size for hedging?

This site shows both correlation and volatility upon which you can base your decisions. If you use TradeStation you can plot both parameters directly on your chart as standard indicators. There is also a correlation function in excel.

Yes, you can hedge and collect the difference but be careful. You already mentioned one of the pitfalls; the hedge may not be 1:1. The second thing to be aware of is that many brokers keep a little of your credit for themselves but pass on the full debit. That definitely errodes your edge and you should ask them how far off of theoretical you will be.

a chf/jpy is a hedge to a degree. Historically it has provided little protection in a major carry trade unwinding and would have caused a margin call during the recent major unwind if too much leverage was used. Also, as you are essentially buying pounds and sell swiss francs, using the same position sizes, it would move with GBP/CHF. I have actually ran this strategy on a demo account for a year or so.

Very helpful site, thanks for posting :-)