EUR/USD, USD/JPY and the position of EUR/JPY was investigated in this paper using regression analysis with the overarching question where EUR/JPY sits in relation to both pairs and its position in terms of a carry trade. What was determined was EUR/JPY switches allegiance period to period. The carry trade premise is to borrow a low interest rate currency and lend in a high interest rate currency. The low interest rate currency becomes the fund currency while the high interest rate currency becomes the investment. The historical assumption promulgates as long as the condition of Uncovered Interest Parity fails, actual carry trades may last for years as an interest rate arbitrage until a possible shock hits the markets or until the disparity in interest rates compresses to Covered Interest Parity whereby positions are covered.
A Case Study in Carry Trade and Cross Pair Allegiance Switching, Pre and Post 2008 (1.1 MiB, 1,443 hits)
