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FINA 308
MINI CASE:
Emerging Markets Carry Trade
 Nahid Hasanli
 Shahmar Aghalarov
OVERALL
• INTRODUCTION
1. Why are interest rates so low in the traditional core
markets of USD and EUR?
2. What makes this “emerging market carry trade” so
different from traditional forms of uncovered interest
arbitrage?
3. Why are many investors shorting the dollars and the
euro?
Case Background:

Carry Trade involves borrowing
or selling a financial instrument
with a lower interest rate and then
using it to buy another one with a
higher interest rate.
Investor
Net =10%

Japanese Bank
Rate = 5%

Australian
Bank
Rate = 15%
After the global crisis, governments and central banks want massive quantities
of capital to circulate in their financial systems, by keeping the interest rates
near zero.
Target inflation rate

Harmonised Index of Consumer Prices (HICP)
Investors engaged in interest rate arbitrage were only earning from the difference in
interest rates without having to worry about movements in exchange rates. However,
this emerging market carry trade gives opportunity to investors to boost their profit by
benefiting both from interest rate differences and appreciation of emerging markets
currencies.
• Constant appreciation of yen in terms of a dollar,
decreasing interest rates in eurozone and U.S made yen
less popular as a funding currency and started a new
trend, which is dollar and euro carry trade.
Would you invest in emerging market
currencies?

• Yes, if you believe in constant appreciation of emerging
market currencies, you can earn substantial amount of
money by investing in those currencies.
Any Question?

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Emerging Markets Carry Trade

  • 1. FINA 308 MINI CASE: Emerging Markets Carry Trade  Nahid Hasanli  Shahmar Aghalarov
  • 2. OVERALL • INTRODUCTION 1. Why are interest rates so low in the traditional core markets of USD and EUR? 2. What makes this “emerging market carry trade” so different from traditional forms of uncovered interest arbitrage? 3. Why are many investors shorting the dollars and the euro?
  • 3. Case Background: Carry Trade involves borrowing or selling a financial instrument with a lower interest rate and then using it to buy another one with a higher interest rate.
  • 4. Investor Net =10% Japanese Bank Rate = 5% Australian Bank Rate = 15%
  • 5. After the global crisis, governments and central banks want massive quantities of capital to circulate in their financial systems, by keeping the interest rates near zero.
  • 6.
  • 7. Target inflation rate Harmonised Index of Consumer Prices (HICP)
  • 8.
  • 9. Investors engaged in interest rate arbitrage were only earning from the difference in interest rates without having to worry about movements in exchange rates. However, this emerging market carry trade gives opportunity to investors to boost their profit by benefiting both from interest rate differences and appreciation of emerging markets currencies.
  • 10. • Constant appreciation of yen in terms of a dollar, decreasing interest rates in eurozone and U.S made yen less popular as a funding currency and started a new trend, which is dollar and euro carry trade.
  • 11. Would you invest in emerging market currencies? • Yes, if you believe in constant appreciation of emerging market currencies, you can earn substantial amount of money by investing in those currencies.