I was cruising until I got to carry trades. Now I have two posts on this and probably more after
Still on page 139-140.
We can eliminate currency exposure in an inter-market trade by receiving fixed/pay floating in the steeper market and pay fixed/receive floating in the flatter market.
Is the main reason for this because we can make up some of the loss from riding the yield curve? Is this correct as to why the carry is attractive even with currency risk?
Thanks,
This post is the same thing: https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91369391
There is no currency risk in that trade because the question asked for a duration neutral and currency neutral trade. The vignette mentions the EUR is stable against the GBP…
Are we talking about the same vignette? Sonia Alexis CFA. There’s three currencies mentioned…GBP, NZD and MXN (there’s no mention of EUR here).
There’s no mention of one currency being stable compared to another here. First they discuss the MXN with the GBP with an inter-market trade with the hope of not having the MXN depreciate or the MXN rates not rising.
Then they discuss NZD where it says it provides attractive carry with or without currency risk. I figured it can provide attractive carry with currency risk due to riding the yield because it discusses that. Riding the yield with a steep curve will allow for a greater return in case the NZD depreciates against the GBP. Does that make sense?
Or am I just too tired for this right now. Aside from this – really appreciate your help today. This stuff is killing me.