Can someone help explain Q17 on Carry Trade return, on the recent CFA Level II 2017 Mock Exam PM?
I’ve managed to get a higher carry return of 3.1% in JPY terms, but the answer is 2.86%. Borrowed in JPY, and invested in AUD at 1.75%, instead of EUR at 1.4% which was suggested by the answer.
Am I missing something?
Correct me if i am wrong, but if the question specifically asks for the JPY/EUR currency pair, shouldn’t you borrow in yen and invest in euro? Why would you get AUD into the picture?
Use the JPY/EUR pair only
hey na_27, thanks for pointing it out
well, I could technically convert the pair into a JPY/AUD pair, invest in the highest AUD rate at 1.75%, which was what I did and got a higher return of 3.1% in JPY terms
I guess for questions like this, I’ll just stick to what’s being ask - like you said if it’s JPY/EUR i’ll just use that pair only
carry trade is investing in a currency with highest interest rate while funding that investment by borrowing at a currency with the lowest interest rate.
in this case, JPY has the highest while EUR has the lowest. forget the in-betweens.