Why Might A Carry Trade End Badly?

Why Might A Carry Trade End Badly?

1 Answer

  1. There are two major reasons for a carry trade to end badly. Firstly, because how moderate things tend to shift for long term like the average of expected short-term interest rates should be almost equal to the interest rate of the long-term investment, thus wiping out potential profits from the carry trade.
    Secondly if interest rates rise more rapidly than expected, then the price of the long-term investment will decrease and create a capital loss for the investor.

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