Notes On The Trade System

795 WordsNov 10, 20164 Pages
Timotius Ferdinand Mini Case 1 FIN 536.03 November 10th, 2016 1. The carry trade is a system to gain profit by borrowing money using low-interest rate currency and then investing it with another currency of high-interest rate. Carry trade is a quick and easy way to get profit. Investors would benefit from the failure of Uncovered Interest Rate Parity (UIRP). According to Bloomberg, the carry trade is the “easy money”, it is an easy way to get profit without any hassle or hard work. Money managers can easily get profit by utilizing the failure of UIRP. The arbitrage techniques work for the investors because the UIRP does not hold. The uncovered interest rate parity is a parity condition stating that the difference between interest rates from any currency should be equal. But in the real world, the UIRP does not hold, this is what attract investors to do arbitrage between currencies. Previously, people pair Australian Dollar with Japanese Yen, but the instability of these both currencies, force money managers to change their funding and target currency, which is why people start to carry trade Indian Rupees and Euros. 2. Developed countries tend to have low or negative interest rates. The main reason for low-interest rates in the developed countries is to stimulate economic growth. European Central Bank (ECB) is an institution that regulates the interest rates in the Euro-zone. Negative or low-interest rate was created to help the slow or low economic growth. In contrast,
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