Valuation Filter

[keep_running]

Hello,

I read this with regard to managing crash risk for carry trade strategies (in regards to FX).

“when a currency falls below/above the band, the trader will overweight/underweight that currency in the traders carry trade portfolio.”

Is it saying that when the value of a currency falls, we are going to take a bigger position in that specific currency? Why is that the case, especially if the value of the currency has fallen below a certain threshold?

Thanks

[Capitalism]

Have to be more specific regarding funding currency/investing currency and think about the position of the carry trade as well as interest rates. If you present a bit more of a question, can probably provide an asnwer. http://www.investopedia.com/terms/c/currencycarrytrade.asp felt like this helped when I initially was learning the mechanics of a carry trade.

[Flashback]

@keep\_running

Hello,

I read this with regard to managing crash risk for carry trade strategies (in regards to FX).

“when a currency falls below/above the band, the trader will overweight/underweight that currency in the traders carry trade portfolio.”

Is it saying that when the value of a currency falls, we are going to take a bigger position in that specific currency? Why is that the case, especially if the value of the currency has fallen below a certain threshold?

Thanks

Parity between various currencies is a mean reverting at least during longer period. Thus, if currency broke lower band, it is undervalued and should be overweighed.