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Inter-market carry trade


1) I cant seem wrap my head around this currency neutral inter-market carry trade concept. One of the strategies is “long position in 10-year bund futures and a short position in 10-year Treasury futures.” How does this strategy avoid currency risk when you long in EUR and short in USD?

2) Another unrelated question, carry trade method - to borrow in a lower interest rate and invest in a higher interest rate currency. “The currency risk in such carry trades cannot be hedged because interest rate parity dictates that the currency with the higher yield will trade at a forward discount to the lower yield currency. If the currency were hedged, it would offset the short-term interest rate differential in the two countries.”  I don’t understand why it cant be hedged?

Thank you!

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Hedging guarantees that you earn the risk-free rate of the funding currency.

The point of carry trade is to try to earn a return greater than the risk-free rate of the funding currency.

Simplify the complicated side; don't complify the simplicated side.

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Thank you S2000magician.

I assume your reply is for question 2).

What about the 1st question? How does long in EUR bund futures and short in USD treasury futures avoid currency risk?

i understand why the swaps would not have currency risk since it buys & sells in one currency and buys & sells in another currency.

But for the futures, I just don’t understand how the currency risk is canceled out.

It’s from the online topical qns:

B is correct. Livera has the swap positions reversed between bunds and Treasuries. Given two upward-sloping yield curves that are both expected to remain stable, an inter-market carry trade can be constructed to avoid currency risk by simultaneously buying and selling both currencies. The choice of the trades depends on which yield curve has the steeper slope, which in this case is the bund yield curve. For swaps, one should receive fixed/pay floating in the steeper market (bunds) and pay fixed/receive floating in the flatter market (Treasuries). For futures, one should take a long position in the futures in the steeper market (bunds) and a short position in the futures in the flatter market (Treasuries).