In the foreign exchange market, currencies are traded in the form of currency pairs. If you buy USD/CHF, you are actually buying US dollars and selling Swiss francs. Just like the example above, you need to pay interest for the currency you sell, and you can get interest for the currency you buy.

The special feature of the arbitrage transaction in the foreign exchange spot market is that the payment of interest is carried out on each trading day according to the position. Technically speaking, all positions are closed at the end of the market. It is impossible if you hold a position that is reserved for the next day. The dealer closes your position and then opens an example position for you, and then they pay or charge you overnight interest, which is the interest rate difference between the two currencies. This is the cost of holding a position until the next day, which is the rollover fee. Of course, some dealers will charge a holding fee other than this. No matter if you hold a low-interest or high-interest currency, you will be charged.

Because the foreign exchange market can use a very high leverage ratio, so carry trading is very popular in the foreign exchange market. Foreign exchange transactions are based entirely on margin, which means that you only need to provide a small amount of funds to be able to carry interest transactions. Many traders only require you to provide 1%~2% of the funds required for the position.

Let us look at an example to experience the power of leverage in spread trading.

Suppose we have a friend who has just started foreign exchange trading and he has 10,000 US dollars in hand.

When our friend wanted to deposit the money at the beginning, he went to the bank to ask. The banker told him that he could pay 1% interest in a year, which means he could get 11,000 US dollars in one year, but he felt that interest Too little. So he wanted to find other investment channels.

He happened to know some people in foreign exchange transactions. After thorough understanding, he wants to engage in foreign exchange transactions. ,

But for the sake of safety before trading, he followed our suggestions to learn basic trading knowledge, and opened a demo account for trading exercise. After two months of hard work, he has mastered the basic trading skills very well, and also mastered a basic trading system that we passed to him. He then opened a real trading account. Deposited his starting capital of 10,000 US dollars. Our friend first carried out a relatively safe carry trade. He found that a currency pair can bring a 5% spread, and he decided to buy this currency pair worth 100,000 US dollars. Since his broker only requires a 1% margin, that is, they provide our friend with a 100:1 leverage, so that our friend can control a currency pair worth 10,000 US dollars with only 1,000 US dollars, and he can Receive 5% interest per year on the assets valued at $10,000. This is even higher than his income from depositing the money in the bank.

If our friends really do nothing during this year, what will happen?

There are three possibilities, let’s take a look at them separately:

The currency pair has lost its original value. The currency pair held by our friend has lost most of its original value. If these losses make the account funds fall below the required margin level, these positions will be forcibly closed.

At the end of the year, the currency pair maintained its original value. In this case, our friend got the 5% interest rate differential. This means that by the end of the year, his total funds have increased by $5,000, which is almost a 50% growth rate.

Currency pair appreciation. If the currency pair held by our friend rises like a rocket, he will not only receive the $5,000 interest spread at the end of the year, but also the spread income. It's a double harvest.

With a leverage of 100:1, our friend obtained a 50% annual return, from $10,000 to $15,000.

The following is an example of a currency pair that provides a 5% spread.

If you buy USD/JPY and hold it for one year, then you will get a positive spread, which is 5%.

Of course, if you sell USD/JPY, you will have to pay a 5% spread by the end of the year, as shown below:

If you sell USD/JPY and hold it for one year, then you will get a -5% spread.

This is the operating process of spread trading.