TAILIEUCHUNG - Lecture Multinational financial management - Topic 8: Carry trade and covered interest arbitrage

Lecture Multinational financial management - Topic 8: Carry trade and covered interest arbitrage. In this chapter, students can compute profits from carry trades and covered interest arbitrage, students understand the function and use of a credit default swap (CDS). | Topic #8: Carry Trade and Covered Interest arbitrage L. Gattis The Pennsylvania State University 1 Finance 407: Multinational Financial Management Review 2 The yen is selling at a 1% premium for one year delivery. . Treasury yields are 3%. What is the Japanese sovereign yield according to IRP? A. B. C. D. E. Learning Objectives 3 Learning Objectives Students can compute profits from Carry Trades and Covered Interest Arbitrage Students understand the function and use of a Credit Default Swap (CDS) The Yen Carry Trade 4 A “carry trade” in one in which you borrow a low interest rate currency and invest in a high interest rate currency. Throughout the 2000’s one of the most popular trades by hedge funds was the yen carry trade when Yen borrowing interest rates were less than 1% and . Treasuries were near 3%. Example (assume spot price remains constant at ¥100/$) Borrow 1 million yen at 1% for one year Sell ¥1 million for $10,000 (¥1,000,000/(¥100/$)) .

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