An interesting comment just appeared on an old blog of mine:
Can you explain, how can a individual investor borrow yen to buy CAD$?
It’s a good question. The fact is that there is a huge universe of investment opportunities which are simply not available to individual investors, and the situation is getting worse. The financial markets love coming up with interesting and innovative new structures for investors to buy, often based on credit default swaps or mortality indices or something equally obscure — and while hedge funds pile in, individual investors are left out in the cold, stuck with crappy old equities. It’s weird — there’s pretty much no riskier investment than buying an individual stock, but retail investors can do that pretty easily, and can even, with a bit more difficulty, buy options on individual stocks. But if they want a much lower-risk investment like an AAA-rated tranche of a CDO, fuhgeddaboudit.
The carry trade is a bit like that: while borrowing yen is a no-brainer for a hedge fund, it’s much harder for an individual. And even if your local bank was willing to lend you yen, I’m sure they’d do so only at a ridiculously high interest rate.
Even if you had a bank willing to do some kind of JPY-CAD swap for you, I still can’t see how an individual can really do this trade with nothing but a bunch of margin. The long side is easy, of course — just go along to Everbank and open a foreign-currency account. But the short side is much harder. You’d think with all the crazy mortgages on offer in the US, someone would have had the bright idea of offering mortgages in yen. But so far, to my knowledge, that hasn’t happened.