risk free rate = 0

D

Dsylexic

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hi all,

i am trying to understand the yen carry trade thing.

since japanese central bank rates were zero for a long period..according to the CML line, this should have resulted in infinite leverage (RFR =0 )?. but obviously nobody really had this infinite leverage.. how is this explained?

thanks
 
Even if the yen rate were zero, there is still credit risk... In addition, carry trades are related to the interest differential and exchange rates, not the level of interest rates
 
I guess Dsylexic was thinking about years ago the central bank of Japan had set their "discount rate" at 0%. But, the carry trade here is how much you could/can borrow/lend in Japanese currency, and it was/is not 0%, (NOT POSSIBLE to have 0% rate, not even 0% financing for your Crysler van in the real term) simply as CFA_GER said - risk premium.
 
below zero?!. you mean banks have to pay interest to the BOJ just to deposit money with it? .wow.the things paper money can do!!
 
Euro yen rates were below zero maybe in 2000 and repo rates were below zero in 2003.
 
Joey, I tried to use BBA historic repo to find out what's going on about 2003. I could not find any -ve rate. I am intrigued to know what's going on about the situation you mentioned. Would you tell us this story, what was going on in the market and economy?? Let me know if I was searching something wrong. http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=228&a=1452

Thanks
 
BBA repo rate? It was US repo rates. I don't even know who Guy Fawkes is/was.

But as you say, there was a story. All interest rates were very low in 2003 and the usual repo agreement is that if you are supposed to deliver a bond but don't all that happens is that you get billed for the entire interest of the repo period when you finally do deliver the bonds. That means that if you enter into a repo agreement when rates are near 0, you essentially have free borrow money cheap options. That meant that there were oodles of delivery failures and the market responded by creating negative repo rates for repo contracts which were contracts to deliver a bond that had to be filled (I think they took your dog or something if you didn't).
 
so, basically, the -ve rate can be intepreted as someone default to deliver here. It doesn't mean banks pay you interest and ask you for borrowing from them........How about euro yen rate case? I understand it would happen for borrowing rate is close to zero, but it is hardly be acceptable if there is any lower or equal to zero rate in the real term. (I am sure they took Fluffy~~). Thanks Joey.
 
Well with the repo rate, if you had one of those bonds you really could get a loan that someone paid you to take. Obviously, it meant that bonds with the special rate were in demand to be rented so it's not exactly a negative rate. Euroyen rates got negative because nobody wanted yen deposits. I doubt you could have borrowed at the negative rate unless you were a bank.
 
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