The Yen Carry Trade: Currency Risk and the Myth of Free Income

Borrow JPY at a low rate, invest in a higher-yield USD asset, and earn the difference. This is the crux of the yen carry trade. However, this entails a certain FX exposure (long USD and short JPY), and FX movements can overwhelm the carry. With a mathematical analysis and a backtest, this paper tests whether a dynamic hedge can suppress the currency risk. This paper's goal is to better understand why the textbook yen carry trade is, in reality, neither free nor stable income.

Authors

Publication Details

Journal
Zenodo (CERN European Organization for Nuclear Research)
Published
2026-08-24
DOI
https://doi.org/10.5281/zenodo.22083644
Primary Topic
Economic theories and models
Type
article
Field-Weighted Citation Impact
0.00
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article

The Yen Carry Trade: Currency Risk and the Myth of Free Income

Samuel Sprauel
Zenodo (CERN European Organization for Nuclear Research)
Economic theories and models
article

The Yen Carry Trade: Currency Risk and the Myth of Free Income

Samuel Sprauel
article en

Abstract

Borrow JPY at a low rate, invest in a higher-yield USD asset, and earn the difference. This is the crux of the yen carry trade. However, this entails a certain FX exposure (long USD and short JPY), and FX movements can overwhelm the carry. With a mathematical analysis and a backtest, this paper tests whether a dynamic hedge can suppress the currency risk. This paper's goal is to better understand why the textbook yen carry trade is, in reality, neither free nor stable income.

Zenodo (CERN European Organization for Nuclear Research)
Openalex Percentile: Top 4%
Economic theories and models
DOIOpen Access PDFOpenAlex
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The Yen Carry Trade: Currency Risk and the Myth of Free Income — Samuel Sprauel · Zenodo (CERN European Organization for Nuclear Research) (2026) | TGRS Research Map | TGRS