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Pages:
2 pages/≈550 words
Sources:
8 Sources
Level:
APA
Subject:
Accounting, Finance, SPSS
Type:
Essay
Language:
English (U.S.)
Document:
MS Word
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# Financial Markets Accounting, Finance, SPSS Essay Paper (Essay Sample)

Instructions:

this was a financial markets task. i had to design a carry trade, test it using real market data, and report the outcome. that BASICALLY required me to buy high-interest rate instruments (mostly currencies) and sell low-interest rate ones .

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Content:

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Institution
A carry trade takes place when one buys high-interest rate instruments (mostly currencies) and sells low-interest rate ones in order to take advantage of the forward rate balance (Burnside, Eichenbaum, & Rebelo, 2011). The forward rate balance refers to the failure of the UIP hypothesis that it –it* = Δst+k + ɛt+k. A failure of the hypothesis means that low-interest rate currencies typically depreciate and high-interest rate currencies appreciate (Berge, Jordà, & Taylor, 2011). Numerous researchers have proposed ways in which one can make the best returns out of the carry trade. One proposal is an equally weighted average version where a trader invests equally in each currency and thus averages the returns. In another version of the trade, a trader first ranks the currencies by interest rate and then dividing the ranking in a defined number of portfolios. Then, the trader sells the portfolio of low-interest rate currencies and buys the portfolio of high-interest rate currencies. This second approach allows one to exploit the best yielding currencies.

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