Carry Trades And The Financial Crisis - 1364 Words

Florencio Ortega Research Paper Carry Trades The Financial Crisis In finance a carry trade is a strategy that consists of borrowing at a low interest rate currency to fund investment in higher yielding currencies. (Moffett) The country in which the investors borrow from is called the funding country and the country where the investment occurs is called the target country. (4) Carry trade is also termed currency carry trade; this strategy is speculative in that the currency risk is present and not managed or hedged. (Moffett) Although there are several complicated carry trades in finance, the most popular are carry trades in the foreign exchange market, which I will discuss in this paper and its role in the financial crisis of 2008. This strategy is executed by using the following the next steps: An investor will first identify a high and low interest rate currency with a significant spread where they believe there is an arbitrage opportunity. Then he/she would borrow in the lower interest rate currency and convert the amount received from the loan into a different currency, one with a higher interest rate. Next, the investor will reinvest this new amount into the bonds of the country with the higher interest rate. (Khan) Based on the returns (interest) of the bonds they will use those funds to repay the amount borrowed. Finally the amount left over after paying the original debt will become the investor’s profit. While this strategy seems simple in theory, in realityShow MoreRelatedFinance : Finance A Carry Trade1144 Words   |  5 PagesIn finance a carry trade is a strategy that consists of borrowing at a low interest rate currency to fund investment in higher yielding currencies. (Moffett) The country in which the investors borrow from is called the funding country and the country where the investment occurs is called the target country. (4) Carry trade is also termed currency carry trade; this strategy is speculative in that the currency risk is present and not managed or hedged. (Moffett) Although there are several complicatedRead MoreFinance : Finance A Carry Trade Essay1144 Words   |  5 Pages In finance a carry trade is a strategy that consists of borrowing at a low interest rate currency to fund investment in higher yielding currencies. (Moffett) The country in which the investors borrow from is called the funding country and the country where the investment occurs is called the target country. (4) Carry trade is also termed currency carry trade; this strategy is speculative in that the currency risk is present and not managed or hedged. 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