Understanding Carry Trades and Their Risks

Easy Currency Exchange Rates Carry Trade

In the context of currency exchange rates, a carry trade involves borrowing in a currency with a low-interest rate and investing in a currency with a higher interest rate. Investors engage in this strategy to profit from the difference in interest rates between the two currencies, known as the 'carry'.

Considering the risks and dynamics associated with carry trades, which of the following statements is true regarding the potential outcomes of a carry trade?

A carry trade is risk-free as long as the interest rate differential remains constant.

A successful carry trade can lead to gains if the higher-yielding currency appreciates, while losses can occur if it depreciates.

Engaging in a carry trade guarantees profit regardless of exchange rate movements.

Hint

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