The questions regarding carry trade are hard to understand. Is there any method which i can use to get to the correct answer with the right analogy.
I agree that carry trade calculations are tough. See a recent thread titled “Carry Trade” that deals with this topic and helps clarify it.
There you go this question was posted here yesterday nothing difficult there follow it closely
INTERBANK CURRENCY QUOTES AND LIBOR RATES
CurrencyPair** BidOffer **ProjecteSpot One-Year Libor Rates
USD/AUD 0.7050-0.7083 0.7148 JPY 0.15% USD/EUR 1.0851-1.0873 1.0984 USD 0.80%
USD/NZD 0.6740-0.6770 EUR 1.40%
JPY/USD 117.62-117.66 118.32 AUD 1.75% NZD 2.00%
Q. Based on the data in Exhibit 1, the expected net investment return on a one-year carry trade based on the JPY/EUR currency pair, measured in JPY terms, is closest to:
- Borrow JPY and buy USD for JPY117.66 (offer); then use USD to buy EUR for USD1.0873 (offer). This generates a cross-rate of 117.66 × 1.0873 = 127.932 = 127.93JPY/EUR.
- The one-year-later cross-rate for the JPY/EUR is calculated as 118.32 ×1.0984 = 129.963 =
1 / 127.93 × (1 + 0.0140) × 129.96] − [1.000 × (1 + 0.0015)] = 1.0301 − 1.0015 = 2.86%