Showing posts with label Bonds. Show all posts
Showing posts with label Bonds. Show all posts

Saturday, October 30, 2010

Global Economy

      The rise in crude oil shows that the global economy is strengthening ; this helps in the rise of share market also.

Inflation

  Inflation rises when global economy of a country rises .If there is no growth for their economy then Deflation occurs .

Currency carry Trading

Anyone borrowing in Yen and putting the money into US Treasuries (US government bonds) has received a double pay-off: from an interest rate difference of more than three percentage points and from the dollar’s rise against the yen.

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 0.1%. 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.

     The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were 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

 Carry Trading is happening due to low interest rates in a particular country 

Why Interest rate is low in Japan is that in Japan most of people are old (and misers)they don't have much needs they deposit most their money in Bank for interest and also Japan's economy is already development to a extent.

IF Inflation rices the price of utensils will rise which will affect an economy and the value of their currency diminishes; which result in export- import companies in that country.

Inflation is normally controlled by Central bank of a particular country by increasing the interest rate thus most of the people invest their money in bank rather than purchasing cars and FMCG products thus the demand decrease and inflation slopes down.

China and their artificial demand
If demand is not rising ;demand can be created artificially by decreasing the interest rates thus the people will take loans and there should be better standard of living of their citizen.But if interest rates are increased in the global economy which will collapse the economy of a country which creates demand artificially.