Can you explain the substance of "transport trading"?


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Answer:
A strategy in which an investor sell a certain currency near a relatively low interest rate and uses the funds to purchase a different currency yielding a highly developed interest rate. A trader using this strategy attempts to capture the difference between the rates - which can recurrently be substantial, depending on the amount of leverage the investor chooses to use.

Investopedia Says... Here's an example of a "yen carry trade": let's read aloud a trader borrows 1,000 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 gross a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gain can become very roomy when leverage is taken into consideration. If the trader in our example uses a adjectives leverage factor of 10:1, then she can stand to take home a profit of 45%.

The big risk in a get trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar be to fall surrounded by value relative to the Japanese yen, later the trader would run the risk of losing money. Also, these transactions are generally done near a lot of leverage, so a small movement contained by exchange rates can result in huge losses unless hedge appropriately.

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Currency trading that explores interest rate difference between currencies/countries. Eg. Borrow low, lend out high.



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