Can anyone please help me to understand the implementation of inter-market carry trade which is guided in the curriculum:
- Borrow from a bank in the lower rate currency, convert the proceeds to the higher rate currency, and invest in a bond denominated in that currency.
- Enter into a currency swap, receiving payments in the higher rate currency and making payments in the lower rate currency.
- Borrow in the higher rate currency, invest the proceeds in an instrument denominated in that currency, and convert the financing position to the lower rate currency via the FX forward market (buy the higher rate currency forward versus the lower rate currency).
What I do not get it is that in step 2, we are borrowing in the low rate currency and invest in the high rate currency - why do we enter in such currency swap?
In step 3: we have already borrowed in the low rate currency in step 1, why do we borrow in the high rate currency?