Carry Trades

Ak1 asked a regarding whats known as carry trading question I'll respond in this new thread.

carry trades is borrowing from low interest rates banks like the fed reserve (0.25%) or the BOJ (0.10%) and lending it to other banks with higher long term rates like Australia (4.75%) the higher the rates the more risky the trade such as the mess that started the flash crash when the Euro zone had billions lent to Greece and Iceland, and they defaulted. So if you borrowed money from the BOJ and lent it to Australia you would long the Aud/Jpy and would net 4.75% if you did this 12 months ago not only would you net 4.750% you would also have received roughly a 4.0625% gain on holding the ought right pair for a gain on the year of 8.81%. 2009 would have been 4.5% + 31.25%= 35.75%
(with 50:1 margin on 20k that would have been $360,000 for the year) The reason for the big gain in 09 was because alot of long term money in the aussie region (mortgages and business loans) defaulted creating a loss of nearly 33% Big banks like bear sterns lost billions because they thought they could off set these loans with the mortgage bundles which turned into whats now known as toxic debt.
This type of trading in now way affects short term trading but does help to know where big banks will put overnight cash. Which lifts developing countries and devalues the reserve currency which are ment to lend to other "booming" regions.
If done correctly and there are complicated formulas that include bonds and mortgage backed securities its a good place for banks to park billions of unused $$$ instead of lending it to business's who need it here in the USA. Or just a sophisticated and profitable way of spreading the wealth around. Because if we help Aussie's and China supposedly they help us...in some way but I have yet to see.
China for years has had an unfair advantage of a booooming economy and the ability to borrow cheap money from the BOJ, and the FED. Chinas rate of nearly 6% is guaranteed because there currency is pegged with the USD. Creating an unfair advantage for them and a deflated USD for us spending money here in America.

here's a list of %rates http://www.fxstreet.com/fundamental/interest-rates-table/