4.3 Carry Trade Flashcards
4.3 Carry Trade Summary
Currency speculators are shifting to the Chinese yuan as a funding source for carry trades, traditionally dominated by the yen, due to Japan’s negative interest rates. Major firms see the weakening yuan as a profitable alternative. The People’s Bank of China has cut rates to address debt and deflation, making borrowing cheaper. Despite concerns over yuan stability and government interventions, many traders find it valuable for diversifying risk. This trend reflects the contrasting economic conditions in Japan and China, with traders capitalizing on higher yields in other currencies.
In the article, what does the acronym PBOC stands for?
The People’s Bank of China which is China’s central bank
What are the pros of using the Chinese yuan as a funding currency for the carry trade?
The yuan has low interest rates.
The yuan is expected to depreciate further.
What are the risks of using the Chinese yuan as a funding currency for the carry trade?
The possibility of government intervention.
Yuan appreciation.
What is the carry trade?
A trading strategy where investors borrow money in a low-interest-rate currency and invest it in a high-interest-rate currency.
What is the reason why, in theory (as we will see later in chapter 6), carry trade should now work?
The extra interest an investor would make by investing abroad should be offset by what the investor would lose in currency depreciation.
Which are the factors mentioned in the article that influence the value of the CNY (Chinese Yuan)?
Chinese government intervention
Economic growth in China
Expectation about the future of China’s economy
Level of interest rates set by the Chinese Central Bank
Which of the following is NOT a risk of the carry trade?
The possibility of making money if the value of the high-interest-rate currency increases.
What are risks of the carry trade?
The possibility of losing money if the value of the high-interest-rate currency declines.
The possibility of government intervention.
The possibility of currency fluctuations.
Which of the following is the most accurate statement about the carry trade?
The carry trade is a risky strategy, but it can be profitable if done correctly.
