Template-Type: ReDIF-Article 1.0
Author-Name: Kornél Kisgergely
Author-Email: kisgergelyk@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank (central bank of Hungary)
Title: Carry trade
Abstract: This study summarises the basic facts related to the investment strategy known as carry trade. Carry trade is a leveraged
investment transaction limited to the foreign exchange market. Foreign investors can only realise extra return if they also assume
the risk of exchange rate fluctuations. Carry trade produces high returns for years, but in turbulent periods the accumulated
profits of several years can be lost within a matter of weeks. High yielding currencies go through a long period of appreciation,
interrupted by sudden strong weakening episodes. Theoretical economists explain stylised facts with the volatility of the risk
premium or the liquidity constraints of investors, or with exchange rate bubbles. Foreign investors financing the Hungarian
economy did not increase, on aggregate, their exposure to Hungarian forints during the last decade. Consequently, the underlying
cause of Hungary’s external indebtedness is most probably not the carry trade activity of foreigners. However, the role of carry
trade in the exchange rate dynamics of Hungarian forint may have increased in the last couple of years.
Classification-JEL: F31, G01
Keywords: carry trade, emerging markets
Journal: MNB Bulletin
Pages: 31-43
Volume: 5
Issue: 2
Year: 2010
Month: June
File-URL: http://www.mnb.hu/letoltes/kisgergely-en.pdf
File-Format: Application/pdf

Handle: RePEc:mnb:bullet:v:5:y:2010:i:2:p:31-43