Questions On Reading An Article About The Carry Trades (Essay Sample)

The Carry Trades
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Investors in different places globally are making money/gathering profits through a trading strategy called carry trade. This is a popular trade among many multinational investors, both big and small. This trade involves two currencies namely funding currency and target currency. A funding currency is one with lower interest rates while a target currency is one with higher interest rates. Now, this trading strategy assumption of how a carry trader would expect to make a profit is when he or she borrows money in a country whose currency is weak and whose interests are low, meaning the borrowing is cheap, and then invests the borrowed money in another country whose interest rates are higher, then at the end of the investment term, the investor can exchange the foreign currency returns with its interests back to a currency with low interest rates in order to gain profits.
In addition, for an investor to gain profits without worrying about exchange rate risks, the exchange rate at the end of the investment period must be relatively unchanged, meaning it should be the same as initial rate when an investor started the investment, otherwise an investor might risk losses.
Although this is a popular trade, there are a number of risks an investor may encounter. One of the risks is about economic changes that may happen in a country or a region especially when an investor has invested his or her money in a country that initially had a high rate of interest and then the currency in that country starts to tumble, this will mean uncertainty of exchange rates and probably a loss for the investor. Another risk within the carry trade is the volatility aspect within the foreign exchange markets. A higher volatility in the foreign exchange market will create difficulty in employing this trade because the markets that present a high interest rate gap in most cases present higher currency volatility and a sudden weakening of the purchased target currency could generate losses and this is a higher trading risk involved for investors.
Now, this popular carry trade involves the exchange of two currencies. The two currencies involved are funding currency and target currency. Usually, a funding currency is one with a low interest rate and a target currency is one which investors are interested in because of its performance, meaning it is a currency with a higher interest rate. Therefore, what investors do is borrow money in a country whose currency is weak and has a lower interest rate then invest the money in a country whose currency has a higher interest rate, then at the end of investment period, the investor exchanges back the investments earnings into a currency with a lower interest rate in order to know how much profit he or she has gained.
Now, according to the article, a number of funding currencies as well as target currencies have been mentioned. Below is a list of these currencies.
The funding currencies mentioned are;
* European Euro
* Japanese Yen
The target currencies mentioned are;
* Indian Rupee
* Indonesian Rupiah
* Philippine Peso
* Australian Dollar
* South African Rand
Among these currencies, some are considered unconventional because it is unusual to think of funding trades for target currencies such as rupees with funding currency such as Euros. This means that an investor should sell a funding currency in order to buy a target currency but not vice versa.
According to the article, Paul Lambert talked about the recent session of volatility in foreign exchange markets which has made employment of the popu...