Central bank interest rates

The Carry Trade technique

The Rollover or Swap

All open positions (at the end of a day of trading) must be "rolled over" to the next day. The interest rate differential between the two currencies will determine whether a credit or a debit is applied to each client's account.

Carry Trade

This technique entails borrowing from a currency whose interest rate is generally low (usually the yen) and investing this money in assets or currencies that earn significantly higher rates. An example would be if you borrowed yen at a rate of 0.5% and invested in New Zealand at a rate of 8.25%.

This type of transaction attracts a large range of investors: both individuals as well as hedge funds, not to mention institutional investors.

The risk is that the yen appreciates in value, which means that any gains that you achieve with a foreign interest rate would be offset by the higher amount you need to pay back to Japanese lenders.