Understanding Volatility Adjusted Carry and What it Reflects about the Brazilian Real
In this article, we better explain this metric used in the carry trade strategy and its implications for the Real
By Eduardo Coccaro, Strategy Analyst
On the foreign exchange (forex) market, the carry trade strategy is commonly used to take advantage of interest rate differentials between different countries. In broad terms, it consists of borrowing funds in a country with a low interest rate in order to invest in fixed income assets of another country that offers a higher interest rate. Assuming thatthe exchange rate between the currency pair in question remains stable, the investor would pocket that difference.
As our readers know, the devil is in the details, and the premise of a stable exchange rate is not a guarantee. Abrupt movements in a currency pair could cancel out expected gains from this strategy, with the interest rate differential being overshadowed by a deep depreciation in the invested currency.