Risks in Carry Trade Strategies

Easy Currency Exchange Rates Carry Trade

Consider a scenario in which an investor engages in a carry trade involving two currencies: the US Dollar (USD) and the Australian Dollar (AUD). The AUD has a higher interest rate compared to the USD. The investor borrows USD at a relatively low interest rate and converts it to AUD to invest in an asset that yields a higher return.

What is the potential risk the investor faces in this carry trade strategy?

The possibility of an increase in interest rates in the USD.

The potential for the AUD to depreciate against the USD.

The risk of lower returns on the AUD-denominated assets.

Hint

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