Currency Carry Trades - Speculating against International Parity Conditions and the Risk of Exchange Rate Reversion
Publication date
2020-07
Document type
Working paper
Author
Grzimek, Volker
Organisational unit
Part of the university bibliography
✅
DDC Class
332 Finanzwirtschaft
Keyword
Speculation
Foreign Exchange
Abstract
Investors have repeatedly benefited from currency carry trades (CCT) in the past, but only during short periods. Therefore, timing is essential and short-term indicators might be helpful. The highest risk of CCT is the volatility of exchange rates. CCT is only possible while the covered interest rate parity CIRP does not hold. We throw further light on the functioning of foreign exchange markets in particular and financial markets in general. Therefore, we discuss different short- and long-term indicators that influence exchange rate movements. Our paper focuses on the opportunity to profit from a higher-yielding currency without currency loss. We analyze whether short-term indicators, especially interest rates, spot rates and their volatility, help to identify trend reversals and allow investors to open, hold or close CCT positions. Besides, we discuss the effect of irrational herd behaviour on CCT strategies.
Version
Not applicable (or unknown)
Access right on openHSU
Open access