Business and Finance
How to make money from the carry trade in Uganda!
During my recent visit to Uganda, I met an astute young lady who had gone back to Uganda 5 years ago. I met this lady at Protea Hotel. When I saw her driving a posh X6 BMW, I was very inquisitive of what she does for a living. “I do currency carry trade,” she said.
Due to the fact that I myself have been advising people to open up £ and $ accounts to indirectly benefit from this informal trade, I decided to tell you more about this trade and how you too can make some money from your hard earned £ and $, instead of letting it lying on accounts in the West.
This lady started with £3000 and now commands a whopping £100,000 investment capital. Though risky, it is still guaranteed, according to currency tends in East Africa.
Currency Carry Trade (Foreign Currency Trade)
It is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
Here’s an example of a “yen carry trade”: a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.
The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.