Which of the following is a feature of the 'Carry Trade' strategy in foreign-exchange markets?
A. Borrowing in a high-interest-rate currency and investing in a low-interest-rate currency
B. Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency
C. Only trading on the basis of purchasing-power parity
D. Only hedging all exchange-rate risk
Answer: Option B
Solution (By JKSSB Mock Tests)
A carry trade involves borrowing funds in a currency with a low interest rate and investing them in a currency with a higher interest rate, thereby earning the interest differential while remaining exposed to exchange-rate risk.
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