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I wanted to take a second and post the current swap rates that can be found at the following address:
http://interbankfx.com/swap_rates.php
For those of you who may be new to the FX Market, it is very important that you understand what swap is and how it can both help and hurt your account. First a quick definition. Swap is basically the interest paid as a result of holding currency overnight. It can be positive or negative depending on the currency pair that you are trading. It is calculated and either added or subtracted from your account daily depending on the currency pair. This is due to the varying interest rates charged in different countries.
Right now the biggest difference is between the British Pound which is paying something in the order of 6-7% per annum and the Japanese Yen which is only paying .25% per annum. So when sell Yen to buy Pounds (aka: buying GBP/JPY) you will be paid 6-7%/365 * #Pounds and you will lose .25%/365*#Yen.
What makes this so promising is the leverage involved. In a typical FX Account you are offered leverage of 100:1 and a Standard Lot size is $100,000. But because of leverage, all you need to control this $100,000 is $1,000 in your account. Lets switch our example to the USD/JPY which is currently paying $13.75/day/standard lot. In this example, for the sake of argument, lets just say that the actual exchange rate between USD/JPY remains constant over the course of the year (extremely unlikely, but just bear with me).
So you invest your $1,000 and buy 1 Standard Lot of USD/JPY. Every day you will be paid $13.75 (or whatever the current differential is) regardless of any movement in the underlying rate. So over the course of a year you will have made $13.75 * 365 =
$5,018 in interest alone on your initial $1,000 investment. Now you may start to see the potential that exists. Hell the underlying USD/JPY cross rate could actually lose value by 600 pips and you would still make money.
Now lets look at what actually happened over the past year in the USD/JPY cross rate:
As you can see, the price at the end of the year was very close to the price at the beginning of the year which means that had you not had a margin call during the -1000 pip decline, that you would have made a 500% R.O.A. Over that same time, EUR/JPY was up over 1500 pips without ever having gone in the red. that means that on top of the $000’s in interest that would have been gained, there was also the potential for $000’s more in capital appreciation.
Bottom line is that the potential is there for great gains if you play your cards right, don’t over-extend your capital, don’t get greedy, and follow a plan designed to take advantage of this money…nothing like having the bank pay you to get leveraged.
Final Thoughts:
* These Carry Trades (as they are called) have been on a tear the past few years and many think they are due for a crash
* You still need to use sound analysis, entry, & exit techniques. Use the interest as gravy, not as meat unless you have a plan that is specifically designed to only profit from the interest (averaging down, scaling in/out can work if done properly)
* Just because 100:1 leverage is offered doesn’t mean that it would be wise to use it all. Drawdowns will occur and if you are leveraged to the hilt, your account will be decimated so just use some common sense here unless you just want to gamble
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December 8th, 2009 
Jason 
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