Understanding Carry Trades in Currency Exchange

Very 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. This strategy exploits the difference in interest rates between the two currencies.

Which of the following best describes the primary reason why investors engage in carry trades?

To speculate on the appreciation of the borrowing currency.

To capitalize on the interest rate differential between two currencies.

To hedge against currency fluctuations.

Hint

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