Question

why the carry trade is a high-risk investment?

Answer 1

• The carry trade is the most important and simple trading strategy in the currency markets in which a high interest cirrecur is traded against a low interest one.
• When the interest rate differential is broader, the carry trader will receive higher returns if the high interest rate currency is held for an extended period of time.
• Carry trade strategy is said to be a higher risk investment due to two main big reasons. They are:

1. Uncertainty of exchange rates :- while trading in forex market, it is not only important to choose a currency with high interest rate but a trader must also consider their exchange rate. If this is not done, then the percentage loss from the trade will be more than the percentage gain from the interest rates.
2. Variations in interest rates :- in carry trade, there is one big problem of variations in interest rates after trading in the currency with higher returns. This will lead to a bad investment in which a trader undergoes losses rather than gaining from it.