Yen Carry Trade and Unwinding – Expained

i m confused with this yen carry trade issue and its unwinding position and hot it can impact our marekt please explain in detail in simple and what is unwinding postions in yen carry trade unwinding ka hindi kaya hota hai ?

As you may know, A lot of big FIIs and Hedge funds are buying stocks in our markets and around the world!

Ever wondered where they get their funding from?

They borrow from Japan @ dirt cheap interest rates of 0.5%…. for that they need to convert their dollars & euros into YEN and then invest globally.

Now imagine that HEDGE FUND (A) exchanges 1 dollar into 123 yen around two months back and buys into some stock market…..

Now the Dollar rate to the YEN becomes 113!,

When dollar becomes 120 from 113, that means that the value of their asset has reduced by 3%…. which is HUGE for the hedge funds!! – It can easily drive them to bankruptcy!

Hence @ $113 – Yen, The hedge funds will fear that dollar may down like last time and they may stand to lose much more in asset valuation….

This is the reason they WILL panic and this will lead to a global sell off – FOR SURE!

 

 

Well Rishi, you are actually telling the reverse. What I understand is as follows:

1) Big institutions borrow in Japan because of lower interest rates.
2) They then convert these yen into dollars. It has been stated that the actual amount borrowed is around $200 billion.
3) This is leveraged 10 times and invested into the markets abroad. That's equal to around $2000 billion invested in overseas markets.
4) At the time of repayment, they again convert their dollars back into yen and repay as and when due.

5) Now the whole things works because of lower interest rates and stable currency. Since the yen is appreciating so sharply, institutions need much more dollars to repay. This has led to negating the effect of lower interest rates. Therefore money may be pulled back from markets worldwide and repaid. This is what is being referred to when they mention "unwinding of yen carry trade"

 

@ gaurav u seem to be making much more sense

yes gaurav is perfectly right

 

 

ya GAURAV is right

and if yen again rise thn there would be a big problem

just yesterday FII sell in japan was seen never before

and IN THAT MAIN THING IS THT TOSE CORPORAT IN JAPAN WHO BOUGHT YEN AT 119 for their funding

NOW IT IS AT 114

1 YEN DECREASE MEAN 50 MILLION DOLLOR OPM LOST

SO wht will be next quater result in japan u can guess

 

 

ok thank u very much guys for sharing knowledge ok now i got it thanx again

wat is the reason for the appreciating yen??

yen rises due to sudden heavy demand for it…when the hedge funds cash in their investments in emerging markets/europe/US they need to repay their yen denominated debt and in case of global sell off the demand for yen can increase substantially
BTW these days indian markets track asian indexes a lot more than Dow and if the yen unwinding becomes an issue the entire asian bourses can go into a tailspin

Yes GAURAV & ROHIT both r absolutely right.
now we have to focus more on YEN thn DOW. in coming weeks to predict our market performances

 

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