It is generally recognised that the most straightforward way
of exploiting proven inefficiencies in the global currency
market is through the carry trade. In the simplest terms, this
strategy aims to capitalise on the so-called forward rate bias
(FRB), which is the tendency of the total return generated by
higher interest rate currencies to outperform the returns paid
by lower-rate currencies.
A simple example of a carry trade in yen, which has been the
most popular low interest rate currency in recent years, is
described in a Barclays Capital update. This involves borrowing
yen at near-zero interest rates and immediately selling the yen
for another currency to invest at higher rates, with the
low-cost yen loan therefore 'carrying’ the high
"For example," the Barclays note explains, "one such trade
would be to borrow yen at 0.5%, sell them for dollars in the
spot FX market and deposit the...