ECON 3104/5304: International Macro Lecture 3
- Supplement Carry Trade
Sang-Wook (Stanley) Cho
c©UNSW Sydney 1
1This material cannot be used for commercial purposes.
ECON 3104/5304: International Macro Lecture 3 - Supplement Carry Trade 1
UIP and the carry trade
• The carry trade is a strategy in which you borrow in the low-interest
currency and lend in the high-interest currency without a forward
cover
• Investor hopes that the exchange rate will not appreciate enough to
wipe out the gains
• Recently, a lot of Japanese housewives participated in the yen carry
trade (“Mrs. Watanabe”)
ECON 3104/5304: International Macro Lecture 3 - Supplement Carry Trade 2
Carry trade: An Example
• Let EU,A$ = 80, iU = 0.1%, iA$ = 3.6%.
• If Mrs. Watanabe expects the exchange rate to remain unchanged,
where would she borrow and lend? What is the profit on $1 traded?
• For what value of E eU,A$, does the carry trade break even?
ECON 3104/5304: International Macro Lecture 3 - Supplement Carry Trade 3