Forward rolls, forward points and carry trades

It is not the purpose of this book to delve too deeply into topics such as forward foreign exchange contracts or currency swaps, or longer term strategies such as the ‘carry’ trade, but being aware of the existence of these will help you to paint a more complete picture of the foreign exchange landscape. We will cover these issues in just enough detail so that you may decide for yourself whether you wish to investigate each area in more detail.

Forward rolls

As mentioned several times, interest rates have a significant impact on the foreign exchange market. Foreign investors pay particular attention to the absolute (real or effective) interest rates in specific countries, as well as to the relative levels of interest rates in different countries. This is partly because the interest rate differentials will determine whether a trader holding a position ‘overnight’ receives a financing benefit or faces a financing cost.