When we borrow in the lower yielding currency (funding currency) are we essentially buying or selling the funding currency? Because one of the questions mentioned that to unwind a carry trade position we need to buy (not sell) the funding currency. Is that correct?
You _ borrow JPY _, convert them to BRL (i.e., sell JYP, buy BRL), and invest (lend) BRL at the local risk-free rate. If you want to unwind the trade, you have to retreive your lent BRL, convert them to JPY (i.e., sell BRL, _ buy JPY _), and repay the JPY loan.
That clears it. Thank you.
You’re welcome.