10. Carry Trade

Question 1

Carry trade
* concept?
* Currency carry trade: …
* Capture the difference between the rates.
* Japanese Yen & Australian/New Zealand $
* Low interest rates, QE

Answer 1

Borrow at a low-interest rate and re-invest in a currency or financial product with a higher rate of return.

High-yielding currency funds the trade with a low-yielding currency.

Question 2

Carry trade: example
* As long as the exchange rate is below 42.86, it is profitable.
* You can …
* What can go wrong?
…

Answer 2

lever up (borrow more) and make significant returns.

• Exchange rate goes up (TL devalues).
• Return in TL assets go down.
• Borrowing rates in the US go up.

Question 3

Carry trade and interest rates
* Foreign currency coming in…
* This makes carry trade safer/more profitable.
* CB increasing interest rates, …
* Stabilizes the exchange rate.
* Reversing the …

Answer 3

increases $s in Turkey, suppress the exchange rate ($/TL).

increases return in TL assets.

policy hurts carry trade.

Question 4

Is this the best way?
* NO! Ideally you would have a $ surplus, not shortage (Norway, sovereign wealth fund $1.74 trillion, $325K per Norwegian).
* If you cannot do that (at least in the short run), you need foreign investments.
* FDI: Foreign Direct Investment : EXPLAIN!
* FPI: Foreign Portfolio Investment
* FPI short-term, flighty. Can be risky, sudden stops.

Answer 4

Foreign Direct Investment
* Preferred way to attract foreign investment (in principle)
1. Building from scratch
2. Acquiring an existing entity (factory, bank etc.)
3. Real estate
* Strategic concerns
* Economic concerns: Technology transfer, creating an ecosystem, price…