Economics Exchange Rate Systems Questions
The carry trade strategy in foreign exchange markets is a trading strategy where investors borrow in a low-interest-rate currency and invest in a high-interest-rate currency to take advantage of the interest rate differential. This strategy aims to profit from the difference in interest rates between two currencies, as investors earn interest on the currency they hold while paying a lower interest rate on the currency they borrowed. The carry trade strategy can be profitable when there is stability in exchange rates and no significant depreciation of the high-interest-rate currency. However, it also carries risks, as exchange rate fluctuations can lead to losses if the high-interest-rate currency depreciates significantly.