Regarding trades, open positions pay and are paid interest. I’ve read and seen this a number of times now but I’m wondering where that interest comes from, A bank? (A bank in the currencies country?) If so, that suggests the bought currency is held as a liability and the sold currency an asset by someone, right?
I’ve looked for an answer to this in the past but found little information about what’s actually happening in FX transactions, apologies if the answer is somewhere obvious.
The currency you are borrowing will charge interest, while the currency you are buying will pay interest. You receive or pay the difference.
Carrying on from Hugh’s comment, much like the profit/loss of the trade, the carry interest on it comes from/goes to the person on the other side from you - with the broker taking the spread, of course.
“much like the profit/loss of the trade, the carry interest on it comes from/goes to the person on the other side from you” So, are you saying that if I’m on the long side of say, AUDJPY the interest I receive comes from someone on the short side of that same pair?
So all open positions with a particular broker pool together the interest for the borrowed currency which is then split up and paid to all the bought currency with the broker keeping some portion of it?
Essentially yes. Retail forex trading is basically a closed loop, zero sum market (negative sum factoring in expenses).
I would, however, not use “borrowed currency” or “bought currency” terms since you never actually do either one. You are either long or short.
Ah, I see. I had assumed the interest was performing some wider economic task but seeing as it is as you say, a closed loop it makes sense to me now. Thanks.