Carry Trade Logic

CFA Level II Portfolio Management
#1

Just checking if my logic is sound…

Over a six month period, here are the details:

BRL/USD spot rate = 5.3588
USD 6-month rate = 1.23%
BRL 6-month rate = 5.22%
Expected BRL/USD spot rate in 6 months = 5.4917

The question asks if you should accept or reject the carry trade, showing calculations.

I got to the right answer using this logic:

Spot Rate Return: 5.417/5.3588 - 1 = 2.48%
Carry Trade Return: (5.22%/2) - (1.23%/2) = 1.995%
Holding Period Return = -0.49%, therefore reject carry trade.

Are there flaws to this approach?

#2

Why USD, not PAB?

#3

Wherever did you get such a elegantly written question?

Yes: your approach is sound.

#4

Lol, from a reputable source.

Bought your mocks last year, but couldn’t write. Will buy this year as well.

Thanks for the feedback.

#5

Lol, USD just makes more sense in my head, don’t ask me why.