I’m looking over carry trade implementation and I’m stuck on Sonia Alexis (BB type at bottom of page 139).  They’re saying that you received fixed/pay floating in steeper marker and pay fixed/receive floating in the flatter marker to eliminate currency risk (top of page 139).

Halfway done on page 140, they say “in contrast, the NZD curve moves to relfect today’s implied forward rates the rate on the then 4.5 year swap will risk by 19 bps from 2.84 to 3.03, the resulting mark-to-market loss will exactly offset the carry accrual”

From exhibit 9, I can see tht the carry accrual is 122.5 bps.  How does the 19 bps change result in offsetting this 122.5 bps?  They give a footnote wit a duration of 4.2 and if you find the approximate price change using this we get:

delta price = 4.2 * .19 = 79.8 bps.  This 79.8 bps is not offsetting the 122.5 bps though.  Where’s the other 40 bps?

Or am i just completely off?  Thanks to anybody.

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wonderwall wrote:
I’m looking over carry trade implementation and I’m stuck on Sonia Alexis (BB type at bottom of page 139).  They’re saying that you received fixed/pay floating in steeper marker and pay fixed/receive floating in the flatter marker to eliminate currency risk (top of page 139).

Halfway done on page 140, they say “in contrast, the NZD curve moves to relfect today’s implied forward rates the rate on the then 4.5 year swap will risk by 19 bps from 2.84 to 3.03, the resulting mark-to-market loss will exactly offset the carry accrual”

From exhibit 9, I can see tht the carry accrual is 122.5 bps.  How does the 19 bps change result in offsetting this 122.5 bps?  They give a footnote wit a duration of 4.2 and if you find the approximate price change using this we get:

delta price = 4.2 * .19 = 79.8 bps.  This 79.8 bps is not offsetting the 122.5 bps though.  Where’s the other 40 bps?

The 122.5 bp is for the 6-month GBP / 5-year NZD carry trade.  The 19 bp is for the 6-month NZD / 5-year NZD carry trade.

wonderwall wrote:
Or am i just completely off?

I’d say that you’re just completely off.

wonderwall wrote:
Thanks to anybody.

You’re welcome, I think.

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How does the resulting mark-to-market loss exactly offset the carry acrual then?  From the passage it says:”the rate on the then 4.5 year swap will risk by 19 bps from 2.84% to 3.03%, the resulting mark-to-market loss will exactly offset the carry acrual”

Where are the numbers for this?  I just want to understand where this offset is coming from?  You mentioned that the 19 bps is from the 6-month NZD/5 year carry trade.  Ok, but on the previous page, the accrual there is 44.5 bps for that pair.  The 19 bps is not offsetting the 44.5.  Again, i’m just confused and lost.

Any help is great here – losing my mind.

I am also confused with this example.

In footnote 11: Why is the duration of the fixed rate side of the swap 4.2?