Showing posts with label Finance. Show all posts

• The first four men (the poorest) would pay nothing.
• The fifth would pay $1.
• The sixth would pay $3.
• The seventh would pay $7.
• The eighth would pay $12.
• The ninth would pay $18.
• The tenth man (the richest) would pay $59.

• The fifth man, like the first four, now paid nothing (100% savings).
• The sixth now paid $2 instead of $3 (33%savings).
• The seventh now pay $5 instead of $7 (28%savings).
• The eighth now paid $9 instead of $12 (25% savings).
• The ninth now paid $14 instead of $18 (22% savings).
• The tenth now paid $49 instead of $59 (16% savings).

1. University of Chicago
   
2. Harvard University
   
3. Northwestern University (Kellogg)
   
4. University of Pennsylvania (Wharton)
   
5. University of Michigan (Ross)
   
6. Stanford University
   
7. Columbia University
   
8. Duke University (Fuqua)
   
9. MIT (Sloan)
   
10. UC Berkeley (Haas)
    
11. Cornell University (Johnson)
    
12. Dartmouth (Tuck)
    
13. NYU (Stern)
    
14. UCLA (Anderson)
    
15. Indiana University (Kelley)
    
16. University of Virginia (Darden)
    
17. UNC - Chapel Hill (Kenan-Flagler)
    
18. Southern Methodist (Cox)
    
19. Carnegie Mellon (Tepper)
    
20. University of Notre Dame (Mendoza)
    
21. Texas - Austin
    
22. Brigham Young (Marriott)
    
23. Emory University (Goizueta)
    
24. Yale University
    
25. University of Southern California (Marshall)
    
26. University of Maryland (Smith)
    
27. University of Washington (Foster)
    
28. Washington University (Olin)
    
29. Georgia Tech
    
30. Vanderbilt University (Owen)
    

1. Queens University
   
2. IE Business School
   
3. INSEAD
   
4. Western Ontario (Ivey)
   
5. London Business School
   
6. ESADE
   
7. IMD
   
8. Toronto (Rotman)
   
9. IESE
   
10. Oxford (Saîd)
    

You will love this!

The Subprime Primer

NoeL

NB: I got this link from www.pagalguy.com. Someone had shared it there. I don't know who the author is, but whoever he/she is, has done a wonderful job!

This is THE BIG question that is being asked by many all over the world, today! Yes or No? With the latest developments with the last standing BIG 2, Morgan Stanley and Goldman Sachs Group Inc., we are forced to believe so!!

On Sunday, Sept. 22, 2008, the standalone investment bank died quietly, after a brief but dramatic illness. It was 75 years old. Hope you all know which one I am referring to here!!

On Sunday night, Goldman Sachs and Morgan Stanley said they would become bank holding companies, submitting to the authority and oversight of federal banking regulators. After the collapse of Bear Stearns, the bankruptcy filing of Lehman Brothers and the agreement by Merrill Lynch to be acquired by Bank of America, Goldman and Morgan were the last remaining investment banks. Goldman noted that the move would make it the fourth biggest bank holding company in the U.S. Morgan said it was seeking “maximum flexibility and stability to pursue new business opportunities as the financial marketplace undergoes rapid and profound changes.”

Christine Harper and Craig Torres at www.bloomberg.com says “The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. andMorgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.”

For more reading:-

1. Bloomberg.com - Goldman, Morgan Stanley Bring Down Curtain on an Era
2. Business Week - And Then There Were None
3. CNNMoney.com - Goldman, Morgan Stanley To Convert To New Model
4. MoneyControl.com - Fed bailout of Goldman, MS: End of I-Bank Era

I always wanted to be an investment banker. The very reason why I wanted to do my MBA was for this! Now what? What should be my long term and short term goals? I will have to readjust myself before the BIG interviews!!

Cheers
NoeL

This ain't funny! Or is it?

NoeL

Many of us are having the following apprehensions or doubts about Credit Cards.

• How does Credit Cards Work?
• What is the VISA or MasterCard logo on the Credit Cards signify?
• What is behind cash back offers?
• Is is safe to use a Credit Card?
• Are Credit Cards handy?
  

You will get your answers below. All these are well explained as a conversation between Ramu & Shamu...

Ramu: I want to buy a Sony digital camera costing Rs.20,000, but I don't have any cash right now.

Shamu: Why don't you use your ICICI Bank credit card? Never heard them say? Hum Hain Na??

Ramu: I am quite skeptic about using these cards. I pay using the card, get a bill after 30 days and pay after another 20 days. This is a maximum of 50 days interest free loan. Why does any bank do it?

If I borrow Rs.20,000 on personal loan at 11%. Interest to be paid for 50 days = Rs. 20,000 * 11% * (50/365) = Rs. 301.40.

Here the bank is giving me a loan without interest when I use the credit card. Something is wrong somewhere!

Shamu: Well? Let me tell you how it works when you use your card to pay for the camera.

• You present your ICICI Bank credit card - a VISA card.
• Sony World swipes your card on a machine provided by Citibank. Lets call Citibank, "the acquirer bank" and the process of Sony World swiping the card on that machine, "requesting authorization."
• Citibank communicates with the card issuer, ICICI Bank through VISA Network to check if the card is valid and has the required credit limit.
• ICICI Bank reviews and approves / declines which is communicated back to Sony World.
• You sign a receipt called Sales Draft given by Citibank. This is the obligation on your part to pay the money to ICICI Bank. Data on this receipt can be captured electronically and transmitted.
  

At the end of day or at the end of some period Sony World chooses:

• Sony World submits the receipt you signed to Citibank who pays Sony World the money. Sony World pays Citibank a fee called Merchant Discount. Let us say this is 6% of the sale value = 6% * 20,000 = Rs. 1200
• Citibank sends the receipt electronically to a Visa data center which in turn sends it to ICICI Bank.
• ICICI Bank transfers the money to a settlement bank which in turn transfers the funds to Citibank.
• Citibank pays ICICI Bank an Interchange Fee of 4% of the sale value =4% * 20,000 = Rs. 800
• 20 to 50 days later ICICI Bank gets the money from you and you don't pay the interest!!
  

Ramu: Interesting! So Sony World pays more than the interest that I should have paid for the loan that I take. I, as a card holder have the following benefits.

1. Convenience of not having to carry cash.
2. Credit availability - Free of interest.
   

However what benefits does Sony World get for paying so much money? Isn't it more profitable for them to take cash? They can save as much as Rs.1200.

Shamu: Certainly. Some retail outlets offer you discounts if you pay by cash, don't they?

However when you don't count the money that you are spending, you tend to buy more! Cards encourage this - called impulse purchase.

If you did not have access to credit, you would not have bought the camera this month, or may be not any time soon either. By accepting cards, the merchant is actually extending you credit at the risk of the card issuer. He pays money to the banks to carry that risk.

Ramu: So ICICI Bank uses this money to pay back to us when they announce 5% cash back. They insist that the Sales draft that I sign at the retailer should also be from ICICI Bank. This means they are saving on the Interchange Fee and also pay me a part of the Merchant Discount
that they get.

Shamu: Exactly! If you have noticed, ICICI Bank gives you the cash back in the next credit card statement. They keep the "cash back" money for a maximum of 60 days before passing on a part to you. This accrues them interest too.

Say if ICICI Bank earns an interest of 6% per annum for the cash they carry? They get Rs.1000 * 6% * (60/365) = Rs. 10

That is not huge, but money nevertheless. And when you consider that almost everyone in this city shops with a credit card these days, it is a big sum.

Ramu: And that also explains why banks tie up with petrol pumps? Like ICICI Bank has tied up with HPCL and I could re-fuel there without having to pay the fuel surcharge of 2.5%. The card issuer and the acquiring bank is the same and that saves interchange fees.

Shamu: Good! You seem to have figured out how it all works!

Let me summarize:

NoeL

NB:- All the numbers used to explain concepts in this article must be treated only as an example. Merchant Discounts may vary from bank to bank. Interchange Fee is regulated by VISA and MasterCard.

I had gone to IIM Lucknow for my FPM interview and written test on April 14th - 18th 2008. Here is a detailed description on the various things that happened during the trip, things that went through my mind and details on the FPM selection process.

April 14th, 2008
I ironed my clothes, ran in search of a tie, scrambled all my (hard earned) certificates and was ready by 7.00PM… I had a train to catch at 7:45PM from Nashik Road Station, which is around 45-60min from where I stay. This time, I didn’t have my friends around to kick me out on time as usual.

In a few minutes, I was in the nearest Auto Stand. This time, I didn’t have time to bargain with anyone. So took the first Auto I saw and reached the station by around 7:50PM. Thanks to the Indian Railways for running the trains late. Else I would not have boarded the 2107 LUCKNOW SUP EXP to Lucknow.

In the train, I exchanged my seats with a lady for the Side Upper Berth… There I comfortably sat with my laptop and started reading one of my favorite books, The Bourne Identity by Robert Ludlum. I was going for an interview for which, I didn’t have a chance to convert. So thought… "Why to take the trouble of preparing in the train? I will do some reading and will relax too…"

April 15th, 2008
I landed at the Lucknow Station at around 5PM, 2hrs later than the scheduled arrival. The sensation I had while coming out of the 3rd AC compartment to the scorching sunlight outside was something I won’t forget for some time.

From there, I took an auto to IIML campus after bargaining with him because this time around, I had all the time with me… My fellow college mate who is a current student at IIML had told me not to give more than Rs.120/-. Lucknow Station to IIML, auto drive was THE AUTO RIDE of my life. All the way, I was remembering the Auto stunt that was shown in one of the James Bond movies… Finally, I reached IIML campus ‘SAFELY’ for Rs.125/- (Hmm... Not bad!!) and in less than 45min (approx. 20Km through busy streets!).

After reaching the campus, I got myself registered. I was allotted Room No. 259 at ‘Chanakya’ Guest house. It was an AC double room but was being given away for single occupancy. For the next 2days, this was where I was going to be. The accommodation was good.

After freshening up, by around 6:30PM, I thought of taking a stroll through the IIML campus. Meanwhile, I had met another fellow aspirant named Prasanna and we both decided to check out the canteen and shops in campus. We had a cup of coffee and together explored more of the campus. One good thing I would like to highlight here is the behavior of the people. All were very pleasant and accommodating. Even the shopkeepers…

At around 8PM, we came back to the guesthouse for dinner. I must say, the dinner was awesome. The preparation was something very different and later on I found out that, it was the Chinese Indian style. (Is there a style like that??) The cooks were all from Assam. Delicious Yummy food!! :)

During this time, I met few more of the fellow aspirants and we all started sharing our profiles with each other. It was a reinstating feeling… As I had thought earlier, I was at the wrong place. All were with PG and 5+ years of relevant work experience. Some of them where already into research and academics and few were JRFs (Junior Research Fellow of UGC). They were surprised when I shared my profile with them. I told them that I came just because I got the call and that I am not even dreaming of converting it… and that was the fact!…

I went back to my room by around 9:30PM and resumed reading the novel. I decided to finish it in this very sitting. So read, read and read. Finally when the novel was over, it was around 2:30AM. That is when the revelation stuck me… I have a written test to attend early in the morning. Thought I will prepare something for the interview after my written test. So kept alarm for 7:30AM and slept off.

April 16th 2008
I was supposed to report at the FPM office at 9:00AM and the breakfast was ready at 8:00AM. Mr. Murphy decided to be extra active, that very day! My alarm didn’t ring. And I was peacefully sleeping till 8:30AM. Thanks to Prasanna for waking me up. Finally, I reached the FPM office by around 9:10AM (Hmm.. not bad!) after completing my daily ablutions and breakfast, as the last reporting candidate.

There after registering my attendance and filling up the travel reimbursement forms, we were directed to an exam hall. There the RAT (Research Aptitude Test) was waiting for us. After the CAT, a RAT…! Details on the RAT can be read here.

We were initially told that the selection process was for 2 days. And so, conveniently I had assumed that my interview would be on 17th April 2008. But to my surprise, my interview was scheduled right after RAT.

I had applied for Finance (My Love!) and Human Resource Management (For the Heck of it… 2 options… so clicked on HR too while applying..!). I had both the calls. The finance interview was the one right after RAT. HR interview was scheduled for a later time, same day itself. Details on my FPM interview can be read here.

After my Finance Interview, I was asked to wait in a conference room at ‘SAMADHAN’. Before I could even finalize upon whether to attend the interview or not, I was asked to move on for the same. I was thinking of meeting the FPM Administrator to tell him that I am not interested. But I couldn’t. So entered the interview board, told them what I felt… and came out in 2-3min… They wished me all the best and told me that I had a very good chance for converting the FPM in finance… (I never believed them!)

So from 16th April 2008 afternoon, it was about spending/killing time @ IIML campus. My train was at 10:00PM on 17th April 2008. I slept for the whole afternoon. In the evening, found out a place where TT and caroms could be played. There, I had a few games with the fellow FPM aspirants till dinner time…

Later on, I got my laptop connected to the institute wireless LAN… I started browsing for the rest of the day… Finally, by around 11:00PM, I decided to call it a day.

17th April 2008.
I woke up around 10:00AM after almost 12hours of sound sleep. After having breakfast, I strolled into the FPM hostel looking for some FPM student. Met this guy from Strategic Management… A very nice fellow… He explained in depth and breadth what the FPM is all about and how the classes were conducted etc… I could learn quite a lot about the program from him. I am really grateful to him for that.

Rest of my day was spent playing TT and browsing the internet. We, fellow aspirants, also had plans of roaming around Lucknow but decided against because of the extremely HOT climate… (It was approx. 40◦C and at Lucknow, they say, it can even touch 48◦C -50◦C)

At around 8:00 PM, I boarded the bus from IIML Campus (there are Govt. buses plying between the campus and the city!) and reached Lucknow station at around 9:15PM… I finally boarded the train at around 10:00PM from Lucknow Junction. I bid goodbye to Lucknow and the people there, never knowing that I was bound to come back!

My take:-
IIML campus is very well maintained and is wonderful. The architect of the campus needs a very special mention here. The whole campus is connected with Wi-Fi and they have different networks (Faculty, Students, Guest etc.) over Wi-Fi… Even the guests are able to logon to the network and use the broadband internet for free. The internet speeds were well over couple of mbps. (I could download a file of 25MB in less than 2 minute.) The people I met, professors, FPM officers, one at the accounts section and the others at the mess, canteen and the shops, where all very accommodative and well behaved. The food was amazing at the guest house though the student might not be getting the same quality. The only problem (I should mention atleast one na?) I could find there was the climate. In short, IIML is a dream campus to be in. (I haven’t seen IIM A, B and C campuses. So I am not making any comparisons with those…)

Comments are welcome...

NoeL

RAT is one of the two selection processes for FPM admission at IIMs. Here are the details of the RAT exam i had at IIM Lucknow.

We were given a caselet. It was about an Engineer who started his own company. This guy started the company in one corner of his house in New Delhi. The company was into manufacturing of ‘premium gift items’. In the initial days, all the products were produced under his direct supervision. He had many suppliers and mostly he was doing the final assembly at his place. Initially volumes were also less.

Slowly but steadily, his business picked up. He started getting huge orders. Then he decided to shift his company out of his garage and for that he acquired land at Gurgaon, which was cheaper than the land available at New Delhi. Most of the suppliers still remained in New Delhi, baring a few who decided to move along with him. He initially hired a few marketing guys to improve his sales. He then hired a manager to look after his Gurgaon plant.

In the initial days of Gurgaon plant, he used to visit it often but as he started more and more ventures, his direct supervision over the Gurgaon plant decreased. He passed on the full control to the manager. This manager guy then went on to introduce lot of best-in-class management practices like Performance Appraisal System, Accounting practices etc. Initial days of the plant went on smoothly and profitably.

But few months from there, the plant got itself immersed into a lot of problem. There were quality issues popping out from everywhere. Even though the order book was full, the workers never showed an enthusiasm to produce more and the plant was never able to meet the demand. Sales slowly started falling. Suppliers started complaining about credit defaults. There were hell lots of problem.

The owner was extremely worried about the condition of the plant and wanted to somehow find out the reason for this. So he asked for the help from a near by management school and the school readily accepted.

Questions:-

• You are a part of the team from the management school investigating on the Gurgaon Plant. What are your observations and possible problems?
• What further data collection you will do for submitting a complete report on the plant and how do you plan to acquire the additional data?

We were supposed write the answer for the above two questions in around 750words.

Time: 1hr.

My Take:-

I felt like this plant is having all sorts of problems that it can ever have. In spite of one’s background, he/she had something or the other, where he/she could put his/her mind to work.

NoeL

TERM OF THE DAY - MAY 06TH, 2008

Rio Hedge

What Does it Mean?
A situation where a trader who is facing financial or legal troubles hedges his or her position in an investment with a ticket to a tropical location. The idea behind the Rio hedge is that if the investment goes bad (either legally or through financial loss) the investor will use the ticket to escape.

Investopedia Says...
The Rio hedge is a joke in the investment community regarding the risks involved in trading. A traditional hedge will protect against potential financial risks associated with an investment. The Rio hedge pokes fun at protecting against risks, such as getting caught by the authorities, lenders, or owners of the funds under management.

NoeL

TERM OF THE DAY - MAY 5TH, 2008

Fool In The Shower

What Does it Mean?
A phrase used to describe the idea that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once. It describes a scenario where a central bank, such as the Federal Reserve acts to stimulate or slow down an economy. When the first stimulus is made, the effect may not be immediate, which can cause decision makers to increase the magnitude of the change, eventually causing too much stimulus.

Investopedia Says...
The phrase is attributed to Nobel laureate Milton Friedman, who likened a central bank that acted too forcefully to a fool in the shower. When the fool realizes that the water is too cold, he turns on the hot water. However, the hot water takes a while to arrive, so the fool simply turns the hot water up all the way, eventually scalding himself.

Any change made to stimulate a broad economy, especially one as large as the U.S. takes time to work its way through. A move like lowering the fed funds rate takes about six months to fully integrate into the economy. Therefore, economists are always cautious about overreaching and prefer small consistent steps to enact change.

NoeL

TERM OF THE DAY - MAY 4TH, 2008

Harvard MBA Indicator

What Does it Mean?
A long-term stock market indicator that evaluates the percentage of Harvard Business School graduates that accept "market sensitive" jobs in fields, such as investment banking, securities sales & trading, private equity, venture capital and leveraged buyouts. If more than 30% of a year's graduating class take jobs in these areas, the Harvard MBA Indicator creates a sell signal for stocks. Conversely, if less than 10% of graduates take jobs in this sector, it represents a long-term buy signal for stocks.

Investopedia Says...
Started and maintained by consultant and HBS graduate Roy Soifer, the Harvard Indicator gave sell signals in 1987 and in 2000, which were both terrible years for the stock market. The esoteric indicator is meant to represent long-term signals based on the relative attractiveness of Wall Street jobs. The more grads that are enticed to go there, the more bloated Wall Street becomes and the more likely the market is nearing a top. When stock markets are doing poorly, fewer grads want to enter the sector. This indicator runs on a similar theme to the old market adage that when everyone else is looking to get in, it's time to get out.

NoeL

Inflation is a measure of rise in general price levels of goods and services. Inflation is measured by taking a set (Consumer Price Index!) of goods and services, and then the prices of the items in the set are compared to prices one time period ago.

In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale prices. Inflation is primarily of two types - inflation due to cost push and inflation due to demand pull (supply side). Cost push inflation is due to rise in costs of input materials or labour, whereas demand pull inflation is due to increase in demand beyond installed capacity.

Controlled inflation is good for the economy as it increases motivation levels of people. The government, in consultation with the Reserve Bank of India, decides the inflation threshold in the country (current inflation threshold range in India is 4-5 per cent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies. Inflation went up quite a bit in the beginning of last year (around seven percent) on the back of high liquidity in the markets (huge funds inflows in the form of FII and FDI). The RBI controlled inflation by tightening the monetary policy (raising cash reserve ratio and interest rates) and letting the rupee appreciate against foreign currencies. Inflation came well within the control limits in the second half of last year. However, inflation is going up again this year from the last few weeks. Last week, it has gone above 7 percent. And this week it has peaked at 7.57percent. Highest in the last 4 years. The reasons of rising inflation this time are quite different from those last year.

Here are some of the main reasons behind rising inflation:

Price rise of essential commodities
The prices of the basic commodities - milk, vegetables, cereals, dairy products, cement, steel, edible oil etc - have gone up quite significantly, especially in the last few weeks. This is due to supply concerns. There is fear in the market that the supply of basic commodities is not increasing in proportion to population growth. This has triggered a wave of speculation in commodities and hence the prices are going up rapidly.

Commodity prices rise at global level
Rise in commodity prices at the global level is another factor that contributes to higher inflation in the country. The correction in global stock markets resulted in a rise of commodity prices all over the world as investors are using commodities, especially precious metals, to hedge their risk.

Rising oil prices
Crude oil prices have gone up significantly in the last few weeks. Although the government is controlling fuel prices in the country, rising crude oil prices plays a crucial role in general price rise.

Increasing demand
India's economy is growing at around 7-8 per cent per annum over the last few years. The per capita income levels have gone up and as a result, the demand for many commodities has increased significantly.

Basically, inflation does not have any direct relation to a fall or rise in the stock markets in the short term. However, when inflation goes up beyond the comfortable limit of the RBI and government, they take some strong policy measures such as tightening of monetary policies, regulatory controls, subsidy etc.

We can hear the word ‘inflation’ everywhere for the past 1 month or so… How many of us are aware of what it is? What are its implications?
I would like to explain what it is in the eyes of 6 different people… viz. House Broker, Politician, a Finance guy, RBI, Ruling Party and a Layman!

House Broker
For him, it is a good thing. He can now give away houses for rent at a much higher rate. Though he is not aware of what actually inflation is and what its effects are, he knows that the prices are increasing… which is for him, an increase in the rent… blessing in disguise!
Who suffers? The man, who is in need of a rented accommodation.

Politician
For him too, it is good thing. After all, he is having a social cause to make noise on and attract attention. This is his golden chance to establish himself and his party. Politician need not turn towards think tanks to come up with ideas like ‘some party’ in Mumbai did recently.
Blind followers of the party will call bandh or harthal and even not hesitate to call it ‘INTERNATIONAL’ when the whole thing will be confined to his neighborhood. Nothing comes out of it.
For the ruling party, it is a very bad thing. For the opposition, it is their golden chance to win the next election.
Who suffers? The man, who is paying a higher price to day-to-day essential goods, viz. rice, vegetables etc.

Finance Guy
This guy mostly will be a finance graduate from one of the premier institutes in India / Abroad. He will start analyzing the so called ‘inflation’ using his various tools… There is nothing much this guy can do… Also this guy is not worried much about it. Because, he is someone whose income has already touched the stars!!
Who suffers? Not him. Not his organization. But the common man who is not even aware of what inflation is and how does it look like…

RBI
This is the most difficult period for the people in RBI. They have to somehow control the inflation. They will start making changes to the monetary policy. (CRR, Repo, Reverse Repo rates!) They have to somehow bring the monster (inflation) down! Tighten the credit… Reduce the money that is being circulated in the market… etc etc..
Any change in monetary policy will take approximately 4-6months to show its effects.
Who suffers? The same common man…! Whom I prefer to call a layman…

Ruling Party
This is the worst thing that can happen to them! Not because they are worried about its effect on the common people. They are worried because, the opposition party or the politicians will make this the biggest weapon to use against them for the coming election. Sleepless nights ahead of them…
Ruling party will start amending its import – export policy. They will start campaign against hoarding. They will try to do whatever they can. After all, they have to win the next election…!!
Who suffers? Should I say who AGAIN??

Layman
For this poor guy, life becomes a burden. He have no idea what inflation is or how it can be controlled. What he knows is that, his daily expenditure is going above the roofs. He might even think of joining the politician (whom I described above) and his party, thinking that, it will help him bring down his expenses! But is never will! Because the politician is there for his own vested interests.

So that is inflation for each one of them!

NoeL

TERM OF THE DAY - MAY 02, 2008

Currency Carry Trade

What Does it Mean?
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use.

Investopedia Says...
Here's an example of a "yen carry trade": a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

--
.:NoeL:.

From today, i will be putting up one Finance Term each here in my blog for your reference. This will in improving the knowledge in field of Finance.
Courtesy : Investopedia

NoeL