if rates in the country we invest in go up, that hurts the investment side of the trade, correct? I haven’t come across an example that says rates in the investment country change and want to confirm.
in the country we borrow in, can that rate of borrowing go up for any reason over the course of the carry trade? I think I’m confused- is it a short or is it a simple loan? Can the lender ask for higher margin/collateral is the long goes down- or is that just in the case of shorting a stock/investment?
So if rates go up in the borrowing country, we would pay more on the borrowing. If the carry period were longer than say 6 months (most of the examples show a 6 month carry), and we borrow for longer than 6 months, is there any scenario where rates going up in the borrowing country would have us losing on price appreciation of bonds in that country? I guess what I’m asking is- in the carry trade- is it a SHORT and a long, or is it just borrowing to buy a long? Is there a difference in those?
For the inter-market portion you’ll borrow (issue bonds) in one currency, convert it to the other currency, then invest (buy bonds) in that currency.
Your return will decline if:
interest rates on the borrowing currency decrease, because the bonds will be more expensive to buy back at the end
interest rates on the investing currency increase, because the bonds will fetch a lower price when you sell them at the end
the borrowing currency appreciates relative to the investing currency, because you’ll get less of the borrowing currency per unit of investing currency at the end
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