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Abstract: Until middle of 2007, yen carry trade was one of the lucrative options to the traders. Not only American dollar (USD) was high in terms of Japanese yen (JPY) during that time (June 18, 2007, …
Abstract: Until middle of 2007, yen carry trade was one of the lucrative options to the traders. Not only American dollar (USD) was high in terms of Japanese yen (JPY) during that time (June 18, 2007, 1 USD = 123.87 JPY) (see Fig 1), but significant differences of interest rates between US treasury and borrowing rate of Japan prompted traders to borrow Japanese currency with a relatively low interest rate and to use the funds to purchase a different currency (i.e. USD) yielding higher interest rate in order to make a significant amount of profit depending on the amount of leverage used. However, afterwards constant appreciation of JPY in terms of USD (December 4, 2009, 1 USD = 87.8 JYP) and reduction of US deposit interest rate has changed the scenario completely. As USD is depreciated in terms of other major currencies (Euro, Great Britain Pound etc.) in 2009 and deposit interest rate in some country (i.e Australia) is still higher than the borrowing rate of USA, traders now are encouraged in going for dollar carry trade instead of yen carry trade. This aspect is described at length in this report with the help of an excel based carry trade software named ‘samcarry’ (see appendix), which is developed by the author. Though major world currencies (Australian dollar, Euro, Japanese yen, Great Britain pound, American dollar) are used to make a comparison to understand which currency is beneficial for carry trade, Indian currency, rupees (INR) is also considered for this purpose.