Ishan Tanna’s Post

 Well explained Ishan Tanna but It is also interesting to see how Interest Rate Parity has been breached. technically increase in Interest Rate of Yen (domestic currency) should have depreciate the yen further keeping $ (foreign currency) as constant but the over borrowed position in Yen forced borrowers to close their trades and demand for Yen spiked, resultantly Yen appreciated. There is significant proportion of Interest Rate Swap in OTC derivatives market. It is estimated to be 60-70% of global OTC derivatives Market leaving other Forward & Future contracts. Sharp appreciation of Yen has created a huge imbalance in Financial Markets. I would also be eager to hear about possible impacts and level of damage it has caused ? #Carrytrade #Yen #Risk

the best explanation on the internet.

Entire world market downturn is perhaps related to the Japanese currency, Yen. Here's the sequence of events: 1. Two weeks ago, the Japanese Yen was trading at 165 Yen per 1 USD (i.e., 1 USD = 165 Yen). 2. For over 30 years, Japan has maintained zero interest rates (even on loans, there was zero interest). 3. Many organizations, funds, and hedge funds took advantage of this by borrowing large amounts from Japan and investing it in the US markets (double benefit of zero interest money and the dollar always appreciating against the Yen). 4. Additionally, since the investment was substantial, most hedge funds also shorted the Yen to hedge their positions (similar to selling call options for easier money). 5. Everything was going smoothly; people had been making free money for years, and this is why Japan is the largest investor in US markets due to its zero-interest money. 6. What changed? Last week, the JCB (Japan Central Bank, similar to RBI in India) decided to raise interest rates by 25 bps after almost 30+ years. And from here, everything changed. 7. Now, zero interest money is no longer zero interest, and there is an additional cost on all your existing loans. Hence, most of the funds that had taken this free interest loan and invested it in the US market started selling off everything to get the money and close the loan (because the US market was already overbought and now these loans no longer had zero interest) 8. Due to the increase in interest, the Yen started appreciating against the dollar, reaching 1 USD = 145 Yen (this was a significant increase in currency value in just 2 days). 9. Now, most of the people who had shorted the Yen (as mentioned in point 4) had to cover their positions because the Yen appreciated significantly in just 2 days. Their call options, which were in between, started moving wildly like the Sensex. 10. Now imagine you took a loan in Yen when 1 USD = 165 Yen and invested it in the US market. Suddenly, 1 USD = 145 Yen, so regardless of your returns, you have a direct cross-currency loss of 13%. (Assume you took a loan of 16,500 Yen which was equal to 100 USD, and now 16,500 Yen is equal to 113 USD. Even if there is no interest, you have a direct loss of 13% due to the Yen appreciating.)

Entire world market downturn is perhaps related to the Japanese currency, Yen. Here's the sequence of events: 1. Two weeks ago, the Japanese Yen was trading at 165 Yen per 1 USD (i.e., 1 USD = 165 Yen). 2. For over 30 years, Japan has maintained zero interest rates (even on loans, there was zero interest). 3. Many organizations, funds, and hedge funds took advantage of this by borrowing large amounts from Japan and investing it in the US markets (double benefit of zero interest money and the dollar always appreciating against the Yen). 4. Additionally, since the investment was substantial, most hedge funds also shorted the Yen to hedge their positions (similar to selling call options for easier money). 5. Everything was going smoothly; people had been making free money for years, and this is why Japan is the largest investor in US markets due to its zero-interest money. 6. What changed? Last week, the JCB (Japan Central Bank, similar to RBI in India) decided to raise interest rates by 25 bps after almost 30+ years. And from here, everything changed. 7. Now, zero interest money is no longer zero interest, and there is an additional cost on all your existing loans. Hence, most of the funds that had taken this free interest loan and invested it in the US market started selling off everything to get the money and close the loan (because the US market was already overbought and now these loans no longer had zero interest) 8. Due to the increase in interest, the Yen started appreciating against the dollar, reaching 1 USD = 145 Yen (this was a significant increase in currency value in just 2 days). 9. Now, most of the people who had shorted the Yen (as mentioned in point 4) had to cover their positions because the Yen appreciated significantly in just 2 days. Their call options, which were in between, started moving wildly like the Sensex. 10. Now imagine you took a loan in Yen when 1 USD = 165 Yen and invested it in the US market. Suddenly, 1 USD = 145 Yen, so regardless of your returns, you have a direct cross-currency loss of 13%. (Assume you took a loan of 16,500 Yen which was equal to 100 USD, and now 16,500 Yen is equal to 113 USD. Even if there is no interest, you have a direct loss of 13% due to the Yen appreciating.)

Entire world market downturn is perhaps related to the Japanese currency, Yen. Here's the sequence of events 1. Three weeks ago, the Japanese Yen was trading at 161 Yen per 1 USD (i.e., 1 USD = 161 Yen). 2. For over 30 years, Japan has maintained zero interest rates (even on loans, there was zero interest). 3. Many organizations, funds, and hedge funds took advantage of this by borrowing large amounts from Japan and investing it in the US markets (double benefit of zero interest money and the dollar always appreciating against the Yen). 4. Additionally, since the investment was substantial, most hedge funds also shorted the Yen to hedge their positions (similar to selling call options for easier money). 5. Everything was going smoothly; people had been making free money for years, and this is why Japan is the largest investor in US markets due to its zero-interest money. 6. What changed? Last week, the JCB (Japan Central Bank) decided to raise interest rates by 25 bps after almost 30+ years. And from here, everything changed. 7. Now, zero interest money is no longer zero interest, and there is an additional cost on all your existing loans. Hence, most of the funds that had taken this free interest loan and invested it in the US market started selling off everything to get the money and close the loan (because the US market was already overbought and now these loans no longer had zero interest) 8. Due to the increase in interest, the Yen started appreciating against the dollar, reaching 1 USD = 145 Yen (this was a significant increase in currency value in just 2 days). 9. Now, most of the people who had shorted the Yen (as mentioned in point 4) had to cover their positions because the Yen appreciated significantly in just 2 days. Their call options, which were in between, started moving wildly like the Sensex. 10. Now imagine you took a loan in Yen when 1 USD = 161 Yen and invested it in the US market. Suddenly, 1 USD = 145 Yen, so regardless of your returns, you have a direct cross-currency loss of 13%. (Assume you took a loan of 16,500 Yen which was equal to 100 USD, and now 16,500 Yen is equal to 113 USD. Even if there is no interest, you have a direct loss of 13% due to the Yen appreciating.) Copied

one of the Major reason of market fall is linked to Japan's currency Yen The sequence of events is as follows 1. 2 weeks ago Japanese Yen was trading at 165 Yen for 1 Dollar. That means 1 Dollar = 165 Yen 2. Interest rates in Japan are zero for the last 30+ years (absolutely zero interest on loans too) 3. Many organizations/funds/HFs took advantage of this and borrowed huge amounts from Japan and invested it in US markets (double benefit zero interest money and dollar was always rising against Yen) 4. Also, since the investment is high, most hedge funds will also protect their position by shorting Yen (similar to selling call options to get even easier money) 5. Everything was going perfectly fine, people were making free money for years and that is why Japan is the biggest investor in US markets because of its interest free money 6. What changed? Last week JCB(Japan Central Bank like RBI in India) has decided to increase the interest rates by 25 bps after almost 30+ years. And from here everything changed 7. Now the zero interest money is no longer zero interest and all your existing loans are now incurring additional cost, so most of these funds who had taken this free interest loan and invested in the US market started selling all their stuff to get money and close the loans (because the US market was already overbought and these loans are no longer zero interest) Result = DJI fell by almost 2000 points in 2-3 days 8. Due to the increase in interest the Yen started rising against the Dollar where it reached 1$=145Yen (this was a huge rise in the currency in just 2 days) 9. Now most of these people who had shorted the Yen in point 4 above had to cover because the Yen rose so much in 2 days their call options which were in between started running like crazy like the Sensex 10. Now you think, you have shorted your If you took a loan of Yen, then it was 1$ = 165 Yen, which you invested in US market and suddenly Yen became 1$ = 145, then regardless of your return, you have suffered a direct loss of 13% in cross currency (Suppose you took a loan of 16500 Yen which was equal to 100$ and now 16500 Yen is equal to 113$, now even though there is no interest, but you have suffered a direct loss of 13% due to this increase). 11. In such a situation, if you sell the goods and escape, then what will you do? The question is what is the solution to this situation now? The solution is simple that America needs to reduce interest rates to deal with this, if it rises somewhere, then a mountain will definitely be created somewhere. If a mountain has been created in Japan, then America will have to create it.

*This entire fall is linked to Japan's currency Yen.* *The sequence of events is as follows*: 1. 2 weeks ago Japanese Yen was trading at 165 Yen for 1 Dollar. That means 1 Dollar = 165 Yen 2. Interest rates in Japan are zero for the last 30+ years (absolutely zero interest on loans too) 3. Many organizations/funds/HFs took advantage of this and borrowed huge amounts from Japan and invested it in US markets (double benefit zero interest money and dollar was always rising against Yen) 4. Also, since the investment is high, most hedge funds will also protect their position by shorting Yen (similar to selling call options to get even easier money) 5. Everything was going perfectly fine, people were making free money for years and that is why Japan is the biggest investor in US markets because of its interest free money 6. What changed? Last week JCB(Japan Central Bank like RBI in India) has decided to increase the interest rates by 25 bps after almost 30+ years. And from here everything changed 7. Now the zero interest money is no longer zero interest and all your existing loans are now incurring additional cost, so most of these funds who had taken this free interest loan and invested in the US market started selling all their stuff to get money and close the loans (because the US market was already overbought and these loans are no longer zero interest) Result = DJI fell by almost 2000 points in 2-3 days 8. Due to the increase in interest the Yen started rising against the Dollar where it reached 1$=145Yen (this was a huge rise in the currency in just 2 days) 9. Now most of these people who had shorted the Yen in point 4 above had to cover because the Yen rose so much in 2 days their call options which were in between started running like crazy like the Sensex 10. Now you think, you have shorted your If you took a loan of Yen, then it was 1$ = 165 Yen, which you invested in US market and suddenly Yen became 1$ = 145, then regardless of your return, you have suffered a direct loss of 13% in cross currency (Suppose you took a loan of 16500 Yen which was equal to 100$ and now 16500 Yen is equal to 113$, now even though there is no interest, but you have suffered a direct loss of 13% due to this increase). 11. In such a situation, if you sell the goods and escape, then what will you do? The question is what is the solution to this situation now? The solution is simple that America needs to reduce interest rates to deal with this, if it rises somewhere, then a mountain will definitely be created somewhere. If a mountain has been created in Japan, then America will have to create it.

It seems unintuitive that a small 25 basis point interest rate hike in Japan would nuke all risk assets. But you need to understand the way the carry trade works: It's a leveraged unwinding. The quick explanation of the carry trade is borrow at 0 rate and invest in something with higher than 0 expected returns: 1. borrow Yen for nothing 2. buy an asset outside Japan that yields more than nothing 3. ??? 4. profit This works as long as: - your borrow rate remains low - your collateral is worth something - and the thing you bought with your loan makes money All those things are becoming not-true for the carry traders. First, rates. The Bank of Japan is being forced into tighter monetary policy to protect Japanese people suffering under inflation. An already-weak Yen was making it hard for Japanese to buy foreign goods--a very tough spot to be in for a resource-poor country that imports most of its goods. So in order to combat inflation, the BOJ raised rates. Recall that interest rates are the price of borrowing money, so if you want less money in circulation, you raise the price of creating money. To the carry traders borrowing Yen in order to buy foreign assets, this is death. They own foreign-currency-denominated assets against Yen-denominated loans. So for someone who OWES Yen and OWNS USD-denominated assets: JPY:USD ↓ = 😁 USD:JPY ↑ = 😭 Higher interest rates exert upward pressure on the Yen's value: First of all, they create direct demand for more Yen because now the yield on Yen has gone up, strengthening the currency because more people want to buy and hold it. Second, it increases the cost of borrow. Higher borrowing costs = less Yen borrowed = less supply = more upward pressure on the Yen. As a result the Yen has SPIKED in value--and the inverse measure, USDJPY has fallen dramatically from a high of 162 to 145. And because the Yen is so much stronger, anyone who was borrowing Yen now owes 10% more in USD terms just over the last few weeks!! So it's a double-whammy for Yen borrowers: - your loan outstanding is higher - your interest rate is higher The result caused some traders to sell their assets and repurchase Yen in order to pay back their loans. But that buy pressure against the Yen sends it up further! Which forces more buying--resulting in a liquidation cascade. Now we see how over the skis the carry traders were. We might not even be close to the end of forced selling. That's the way these cascades go. Only the folks with horrible risk management get liquidated first, but the building snowball eventually eats up anyone on the wrong side. This is why risk assets are taking a tumble. The hidden leverage in the system was the infinite money glitch that was Japan monetary policy. The BOJ was the piggy bank for the world's assets. But the piggy bank just closed. #rates #fed #boj #japan #markets #bonds #stocks #trade

he Appreciation of Japanese Yen against dollar : here's a rundown of what happened : 1. A couple of weeks back the Japanese yen was trading at 165 yen per dollar. 2. For the past 30 years, Japan's interest rates have been at rock bottom—effectively zero. This meant borrowing money there was essentially free. 3. Many funds and hedge funds took advantage of this by borrowing cheaply from Japan and investing in the U.S. markets, enjoying both the low-cost money and the rising value of the dollar against the yen. 4. To protect their investments a lot of the funds betted against the yen ( short yen) similar to selling a call option - easy money. 5. For years, this strategy worked well. Japan ended up being a huge investor in the U.S. markets thanks to this zero-interest money. 6. But then, last week, the Japanese Central Bank raised interest rates by 25 basis points for the first time in nearly 30 years. This was a game-changer. 7. With zero-interest money gone, the cost of existing loans went up. As a result, many funds that had borrowed yen and invested in the U.S. started selling off assets to cover their loans. This added to the pressure on the already overbought U.S. market, causing the Dow Jones to drop about 2,000 points in just a few days. 8. The yen also strengthened against the dollar, going from 165 yen per dollar to 145 yen per dollar a 13% rise in just two days. 9. Those who had short the yen found themselves in trouble, having to cover their positions as the yen’s value surged. Their losses were mounting, similar to a sharp rise in the Sensex. 10. Now imagine you took a loan in yen against dollar when the exchange rate was 165 , now when the yen appreciated to 145 per dollar , even if your investments did well you are still facing a 13% loss from just the currency shift alone( 16500 yen Loan amounts to 100 USD and now is 113 USD) . 11. In a situation like this, would you stick around or sell off everything to cut your losses? The big question now is what to do next. One potential solution could be for the U.S. to lower interest rates to help balance things out.

The entire decline is tied to the Japanese currency, the yen. The sequence of events is as follows 1. 2 weeks ago the Japanese yen was trading at 165 yen against the dollar. That is 1 dollar = 165 yen 2. Japan has had zero interest rates for the last 30+ years (absolutely zero interest even on loans). 3. Many Institutions/Funds/HF took advantage of this and borrowed huge sums from Japan and invested it in US markets (double benefit zero interest money and dollar always rising against yen) 4. Also, since investments are high, most hedge funds will also hedge their positions by shorting the yen (similar to selling call options to get easy money). 5. Everything was going perfectly fine, people were making money for free for years and that's why Japan is the biggest investor in the US markets because of its free money. 6. What changed? Last week JCB (Central Bank of Japan like RBI in India), decided to hike interest rates by 25 bps after almost 30+ years. And from here everything changed 7. Now zero interest money is no longer zero interest and all your existing loans are now at extra cost, so most of these funds that took these free interest loans and invested in the US market started selling all my stuff to get and close. done loans (since the US market was already overbought and these loans no longer carry zero interest). Result = DJI dropped about 2000 points in 2-3 days 8. The increase in interest caused the yen to rise against the dollar where it reached 1$=145yen (this was a huge currency gain in just 2 days). 9. Now most of these guys who shorted the yen in point 4 above had to cover because the yen went up so much in 2 days that their call options in the middle of the sensex started running like crazy. 10. Now imagine, you took a loan of your yen money, the tab was 1$=165Yen which you invested in the US market and suddenly the yen goes to 1$=145, so regardless of your return, your direct cross currency is 13%. (Suppose you took a loan of 16500 yen which was equal to 100$ and now 16500 yen is equal to 113$, now there is no interest but 13% is directly lost due to loss of yen) 11. SITUATION IN SUCH A SITUATION, WHAT WILL YOU DO Otherwise you can survive by selling the goods now the question is what is the solution to this situation? The solution to this is simple: America needs to lower interest rates to counter this if it stands still in one place it will form a mountain in another. If a mountain is built in Japan, America has to build it