The Profitability of Carry Trade Relative to Forecasting-Based Trading in the Foreign Exchange Market Harvard Case Solution & Analysis

The Profitability of Carry Trade Relative to Forecasting-Based Trading in the Foreign Exchange Market Case Solution

Introduction

The Carry trade is widely used phenomena in which the trader borrows the money at low interest rate and later invests the money to gain high profits.The practice of the strategy is done heavily in the foreign exchange market. In carry crade in foreign exchange market, the investor sells the currency with low interest and later buys the currency with high interest rate, which results in high profits for the investor.

Exchange rates are the ratios of currency of one country to the currency of another country. Exchange rate is used to exchange the currencies between the countries in order to maintain the value of currency of one country. The exchange rate is mostly promised by the foreign exchange market.

The spot and forward exchange rates are used for the exchange of the currency to another. The retail exchange market deals with different buying and selling rates to the dealers. The exchange rate would also be referred to as the sensitivity of the currency of the country in order to adapt to other country.

The profitability and high returns on the carry trade is often observed with the trade in huge amounts. The investor uses the differences in the exchange rates as a tool to earn profits on the assets and interest rates. The reliability and stability of the strategy depends wholly on the asset prices.

There is a huge risk involved in the uncertainty of the exchange rates. The risks involved in the carry trade are leverage risk, currency risk, and the shift risk in the interest rate. The exchange rate or value of the currency falls relative to other currency will have huge impact as the investor dealing in the first currency would face severe losses, while the investor dealing in the second currency would enjoy the benefits from this fall.

In order to decrease the risk associated with the currency changes, the investors use several strategies in order to forecast the future changings in the currency and to eliminate the maximum risk associated with the money changes. The currency carry trade is different from other investing options, as it benefits the investors from the changes in the interest rates by just holding or carrying the investment.

The main purpose of the paper is to research on the profitability of the currency carry trade with respect to the forecasting based trading. The purpose of the paper will be fulfilled by preparing different models in order to evaluate minimum and maximum risk associated with the carry trade in the foreign exchange market. The risk of the carry trade will also be evaluated in comparison with the minimum and maximum return acquired by owning the risk of the currency carry trade.

A number of sources are used in the paper in order to get appropriate results. The paper deals with the currencies of United Kingdom and Singapore. The exchange rates, interest rates, and the stock price of Singapore and United Kingdom were analyzed in order to acquire the better results.

In order to provide a better view of the paper, the research paper is categorized into five basic sections or chapters. The first chapter deals with the introduction, purpose, and objectives of the paper. The second chapter of the paper have the literature review of the past researches, the second chapter is organized in a way that would give the maximum background researches and how this research is changed from the past researches...................

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